Kaiko believes tokenized treasuries will retain appeal amid expected Fed rate cuts

Research firm Kaiko believes that tokenized Treasuries will continue to attract investors, even in the face of anticipated US Federal Reserve rate cuts, which can often diminish the appeal of fixed-income assets.

According to the firm’s second-quarter market report, interest in these tokenized funds continues to grow due to their attractiveness to investors seeking liquidity and security. 

Kaiko explained that even with potential rate reductions, the real Fed funds rate — adjusted for inflation — may remain stable or even increase. This scenario could keep Treasuries attractive compared to riskier assets, as investors prioritize liquidity and safety.

Growing activity

According to Kaiko’s research, BlackRock‘s on-chain tokenized fund, BUIDL, has become the largest on-chain fund by assets under management (AUM) since its launch in March, with net inflows of $520 million as of June-end.

The fund is part of a growing trend of tokenized funds offering exposure to traditional debt instruments like US Treasuries. Other notable funds include Franklin Templeton‘s FOBXX, Ondo Finance’s OUSG and USDY, and Hashnote’s USYC, all providing yields aligned with the Fed funds rate.

The report also details the growing activity in the on-chain market for these tokenized assets. Ondo Finance’s governance token, ONDO, experienced a significant trading surge after announcing a collaboration with BUIDL — hitting a record high of $1.56 in June.

Challenges

However, the report noted that inflows into these funds may face challenges as the US rate environment evolves since market hype has subsided.

Despite expectations of potential Fed rate cuts, with markets pricing in 100bps of cuts this year, the appeal of tokenized Treasury funds may persist. Recent weaker-than-expected US inflation data has strengthened expectations for a September rate cut.

However, rate cuts may not necessarily translate to easing monetary policy. If inflation falls at the same pace or faster than…