Jeff Hummel on Tether

My friend and monetary theory teacher (of me) Jeff Hummel writes beautiful responses to various friends who comment on monetary issues.

In a discussion of Tether, one of his friends quoted a source saying, “Tether is the third largest buyer of three-month US Treasuries and is projected to be the first next year. Tether now owns more US Treasuries than the governments of Germany, the United Arab Emirates (UAE), and Australia.”

Jeff responded:

Thanks for your interesting comment about Tether. It motivated me to check your source for more details. Here are some direct quotations from the article: “Tether became the third largest purchaser of three-month US Treasuries after the governments of the United Kingdom and the Cayman Islands in the second quarter of 2024, a press release reveals. . . .Tether Holdings owned $97.6 billion worth of US Treasuries in June 2024, a new high. Hence, Tether now owns more US Treasuries than the governments of Germany, the United Arab Emirates (UAE), and Australia. Hence, Tether is now the 18th largest holder of US Treasury bonds.”

The Treasury issues Treasury bills every week, and I cannot find any government data on how many of those bills have a maturity of three months. This makes the first sentence I quoted above hard to evaluate. But notice that the next two sentences refer not just to T-bills but also to all Treasury securities held by Tether. So I decided to compare the $97.6 billion of Treasuries held by Tether with the total amount of Treasuries outstanding. The data most convenient for me to access are from the previous quarter, but since government debt is almost always increasing in both real and nominal amounts, that biases upward the measure of the relative amount of Tether holdings.

As of the first quarter of 2024, the market value of the total amount of publicly held Treasuries outstanding was $24,693.7 billion (with a face value $2.115 billion higher). And this does not include the additional $7,053.1 billion of the gross national debt that is held by other government agencies, primarily the Social Security and Medicare trust funds, which are not marketable to the public and represent only money the government has loaned to itself and then spent. Thus, Tether’s $97.6 billion amounts to only 0.395 percent of the publicly held U.S. debt. For comparison, the Federal Reserve holds 16.88 percent, money market mutual funds hold 10.30 percent, and commercial banks and other depositories hold 5.08 percent. [Source: Federal Reserve Board, Financial Accounts of the United States (June 2024), p. 119.]

The face value of the national debt in the form of Treasury bills of all denominations was $6,061.7 billion in the first quarter of 2024. It is not clear that all of Tether’s holdings are T-bills because, as your source points out, a small amount of them are in the form of repos or reverse repos with the maturity of the underlying securities unstated. Again quoting, “In detail Tether held $80.95 billion in US Treasury bills, $11.287 billion worth of overnight repurchase agreements for US Treasuries, and $997.373 million worth of Term Reserve Repurchase Agreements for US Treasuries, the BDO Italia S.p.A. accounting firm estimates.” Including the total of both repos (which are Treasuries loaned by Tether) and reverse repos (which are Treasuries borrowed by Tether) is technically double counting Tether assets, but by an amount that is minor. So if we count all these transactions and assume they all involve T-bills, that would mean that Tether is holding 1.34 percent of the outstanding amount of T-bills, admittedly a large proportion for a single firm.

What about the article’s comparison with foreign holdings? The total market value of foreign holdings of all Treasuries has been declining over recent years and as of the first quarter of 2024 they amounted to $8,114.9 billion (32.8 percent of the total publicly held debt). Foreign governments at that time held less than half of the amount of Treasuries held abroad: $3,815.0 billion, of which only $267.0 billion were Treasury bills of all denominations. The U.S. does not provide a break down by individual country of the amount of foreign government versus private holdings so as to preserve the confidentiality of individual holders. But German, both government and private, holdings of all Treasuries  were $90.2 billion. [Source: U.S. Treasury Department, “Table 5: Major Foreign Holders of Treasury Securities.] That comes to only 0.37 percent of the publicly held debt, or 1.13 percent of the debt held abroad. That puts Germany behind eighteen other countries in its holdings of U.S. government debt as of first quarter of 2024. Thus it appears that the statement in the article that “Tether is now the 18th largest holder of US Treasury bonds” was comparing Tether holdings, not with domestic debt holders at all, but only with foreign holders.

Here’s the Wikipedia entry on Tether.

Jeff writes, “This is not to deny that Tether has become a revolutionary and useful part of the financial system. It is essentially a digital bank, with fractional reserves in the form of fiat dollars but with most of its assets in the form of financial investments. It issues what could be described as digital banknotes or deposits that are more liquid than ordinary bank deposits, especially for cross-border transactions and transactions with other crypto. Tether thus offers services that traditional banks cannot provide because of government regulations.”

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