Interview with Circle’s Chief Economist: USDC’s Entry into Hyperliquid Benefits Both Circle and HYPE—Stablecoins Are Becoming the Marginal Buyers of U.S. Treasuries
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Interview with Circle’s Chief Economist: USDC’s Entry into Hyperliquid Benefits Both Circle and HYPE—Stablecoins Are Becoming the Marginal Buyers of U.S. Treasuries
The narrative that stablecoins are marginal buyers of U.S. Treasuries is more substantive than people give it credit for.
Navigating Web3 tides with focused insightsCompiled & Translated by TechFlow
Guests: Gordon Liao (Chief Economist, Circle), Ram Ahluwalia (Co-Founder & CEO, Lumida Wealth), Chris Perkins (Managing Partner, CoinFund)
Host: Austin Campbell
Original Title: The Fed, China, and CLARITY + Coinbase Eats USDH
Podcast Source: Unchained
Air Date: May 19, 2026
Editor’s Note
In this episode, Gordon Liao, Chief Economist at Circle, offers his first systematic explanation—grounded in market structure logic—of why USDH is being replaced by USDC. USDC balances on Hyperliquid have doubled over the past year; 90% of reserve yields flow back to Hyperliquid for HYPE buybacks; Coinbase serves as treasury deployment partner, while Circle handles technical deployment and stakes 500,000 HYPE tokens to secure a validator seat.
Gordon also dissects long-end U.S. Treasury yields. The current 30-year yield breach above 5% is primarily driven by term premium—not expectations of future short-term rates—while stablecoins are quietly emerging as marginal buyers of Treasuries. In Q1 2026 alone, USDC’s on-chain settlement volume reached $21 trillion. Stablecoin concentration in short-dated Treasuries effectively lowers the overall weighted duration of U.S. government debt—potentially offering counter-cyclical support to long-end yields.
Additionally, the episode offers nuanced takes on the CLARITY Act’s current impasse and divergent views on where AI value capture resides following the OpenAI litigation.
Key Quotes
USDH Replaced by USDC
- “This is essentially a liquidity supernova event. As the dominant on-chain perpetuals platform, its choice of collateral asset radiates across the entire on-chain economy.”
- “Eight or nine months ago, a governance vote selected a different reference asset. But as the platform matures and scales, it must increasingly engage with traditional institutions—and using high-quality, institutional-grade collateral is a critical part of that.”
- “Anywhere TVL can be captured—be it an exchange or a prediction market—will seek to monetize that floating-rate yield. Why cede that revenue to third parties?”
- “For Coinbase and Circle, this is a strategic move to neutralize an emerging competitor. By acting as the collateral management partner, Coinbase embeds itself at a pivotal node within this new infrastructure.”
Stablecoins’ Multiple Attributes
- “Whether stablecoins are mediums of exchange or stores of value isn’t an either/or question—we see them functioning simultaneously as multiple things. In payments, they’re mediums of exchange; in other contexts, they serve as carriers of capital liquidity and collateral liquidity. As systems scale and institutionalize, the latter role grows increasingly important.”
- “Agents will likely want a money-market fund that pays interest while idle—but the moment they initiate a payment, they’ll want that money packaged as a stablecoin. The compliance paperwork required just to pay via securities is unbearable.”
OpenAI Litigation and AI Value Capture
- “There’s almost no value capture at the LLM layer. These AI labs spend tens of billions providing free services to us—it’s essentially public service. The value of LLMs lies in model weights—that’s IP.”
- “Whoever controls the end user delivers the greatest value. Value accrues primarily at the application layer, and with cloud providers and AI implementation services—like Accenture—which stand to earn handsomely.”
- “I see this as a barbell structure. On one end is distribution; on the other, energy. Whoever secures nearly-free energy and cheap compute wins—and Elon holds an advantage here.”
On the CLARITY Act
- “The compromise between Senators Thom Tillis and Angela Alsobrooks fundamentally separates money’s three functions: store of value, medium of settlement, and unit of account.”
- “We’re approaching Hillary’s Step—the final, most difficult stretch before summiting Everest. There remain open questions about committee seats—and ethics. That ethical hurdle will be especially tough.”
- “From the outset, I’ve viewed the banking industry’s fight here as quixotic. What exactly are they trying to extract? Are they merely stabbing each other—or handing a gift to asset managers?”
Long-Term Treasuries and Rates
- “Most of the upward pressure on the 30-year yield stems from term premium, now around 80 bps—significantly elevated versus two years ago when it was negative. This reflects supply-demand dynamics—not expectations of future short-term rates.”
- “The narrative that stablecoins are marginal buyers of Treasuries is more substantiated than commonly credited. Their duration profile is extremely short—concentrated in short-dated bills and reverse repos. This effectively frees up space for the Treasury to issue more short-term debt, and—when weighted by dollar duration—reduces the effective supply of long-duration U.S. debt in the market.”
- “Investors are simply saying: ‘I need greater compensation to hedge rising inflation risk.’ That’s it. They know the Fed isn’t inclined to cut rates.”
Coinbase and Circle Jointly Acquire USDH
Austin Campbell (Host): Hello everyone, and welcome to Bits + Bips—where crypto and macro collide, one basis point at a time. I’m your host, Austin Campbell. Joining me today are Ram Ahluwalia, Co-Founder & CEO of Lumida Wealth; Chris Perkins, Managing Partner at CoinFund; and Gordon Liao, Chief Economist at Circle. With plenty happening in rate markets and headlines, I’m especially eager to hear Gordon’s perspective.
Let’s begin with Circle. Coinbase and Circle have, in effect, “eaten” USDH. USDC will be crowned Hyperliquid’s (an on-chain perpetual DEX) aligned quote asset. Native Markets—the winner of an eight-month-old governance contest—has now been acquired by Coinbase. USDH holders will redeem into USDC during the migration period; Coinbase will serve as Hyperliquid’s official reserve fund management/deployment partner for USDC; Circle will handle USDC’s technical integration and infrastructure operations on Hyperliquid and stake 500,000 HYPE tokens to secure a validator seat. Ninety percent of reserve yields will flow back to Hyperliquid—likely channeled through an aid fund for HYPE buybacks.
Rough math: Hyperliquid currently holds roughly $5 billion in USDC. At under 4% yield, that’s nearly $200 million annually—most of which flows to Hyperliquid, with Coinbase taking a cut and Circle gaining a new, high-volume USDC deployment venue to continue closing the gap with Tether.
The bull case points to deeper order books, reduced conversion friction, faster deposits and withdrawals, and stronger market-maker support—with HYPE tightly integrated into platform fees, staking, and builder incentives. Bitwise is concurrently filing for a spot HYPE ETF. The bear case—represented by figures like ZachXBT—warns that if Hyperliquid’s core collateral, quote asset, and liquidity become increasingly dependent on USDC, the system surrenders part of its sovereignty to Circle/Coinbase/regulatory mandates. Governance concerns around Native Markets also persist. Chris, as an investor deeply embedded in this space, how do you view this?
Chris Perkins: I see this as one of many moves we’ll witness going forward—the keyword is “net interest income.” Step back from traditional exchange models: you earn nominal transaction fees on every trade; clearing is typically unprofitable—even though in our ecosystem it’s evolved into a new business line, sometimes monetized via data. But the real money lies in net interest income.
In traditional finance, customers deposit dollars with you as margin; you pass those dollars to a clearinghouse, which invests them and keeps most of the returns—paying you only a small share. That spread is your net interest margin—and it’s foundational to any exchange’s business model. Many decentralized applications previously overlooked this lucrative revenue stream, handing it freely to third parties. Now they’re waking up—and seizing it back.
I can tell you: anywhere TVL can be captured—exchanges, apps, prediction markets—they’ll find ways to monetize that floating-rate yield. Why hand it to someone else?
From an exchange’s vantage point, this is bullish—Hyperliquid surged post-announcement because the “Circle” loop is now closed (a double entendre). Solving for net interest income directly benefits token holders. From Circle’s and Coinbase’s side, they win too—details, of course, lie in the terms: how long the peg lasts, how often rates are renegotiated—I don’t know whether Gordon can disclose that. But what they gain is ubiquitous adoption: USDC is fungible, and the more widely it circulates, the greater the likelihood users accept it as a payment instrument.
So USDC wins, too. Economic terms may evolve further. Hyperliquid wins big—by locking in net interest income. Circle gains broader adoption, larger scale, wider distribution, and—hopefully—incremental utility. It’s a win-win.
Austin Campbell: Gordon, let me toss this to you. I’m personally familiar with Circle—and USDC wears many hats in today’s market. From a market-structure lens, Americans traditionally view money hierarchically: the dollars you use to buy coffee differ from those used to settle derivatives. Yet we’re now seeing USDC deployed across both—and its substitutability is increasing. How does Circle view this? And zooming out to your economics background—how do you assess market structure more broadly?
Gordon Liao: A few observations. First, we’re witnessing infrastructure maturing holistically. Hyperliquid is today’s dominant on-chain perp platform—and its scale has grown substantially. USDC balances there have roughly doubled year-on-year.
Yes, that governance vote eight or nine months ago selected a different reference asset. But as the platform matures, it must interface with traditional institutions—and deploying high-quality, institutional-grade collateral is a critical component of that evolution. Choosing USDC signals recognition of its underlying security and its ironclad 1:1 reserve commitment.
As Chris noted, this is a win-win—and a liquidity supernova event. As the dominant on-chain perp platform, its chosen collateral radiates across the entire on-chain economy. So this is a massive liquidity event—one that encourages broader adoption of USDC and associated infrastructure.
We deployed USDC to Hyperliquid last September—alongside CCTP (Cross-Chain Transfer Protocol). So it’s been there for some time—but this represents a powerful “reconfirmation.”
On whether stablecoins are mediums of exchange or stores of value: we observe them serving multiple roles simultaneously. In certain contexts, they function as payment media; in others, as vehicles for capital liquidity and collateral liquidity. As systems scale and institutionalize, the latter role becomes increasingly vital.
This trend is equally visible in settlement volumes. Our latest earnings report disclosed $21 trillion in USDC on-chain settlement volume for Q1—a reflection of expanding infrastructure and improving liquidity across top platforms, centralized or decentralized.
Austin Campbell: Following that thread: USDC’s circulation is deeply intertwined with Coinbase. Many of Coinbase’s products—from debit cards and credit-card payments to corporate payment rails—were built on USDC. Now we’re seeing it adopted as the core asset for exchanges like Hyperliquid. Ram, from a market perspective—does this make you more bullish or bearish on Coinbase’s and Circle’s equities?
Ram Ahluwalia: It’s bullish for all—and especially for Hyperliquid. For Coinbase and Circle, it’s a strategic move that neutralizes an emerging competitor. By embedding itself as the collateral management partner, Coinbase positions itself at a pivotal node within this new infrastructure.
For Hyperliquid, retaining 90% of revenue is a payoff for years of execution. We discussed Hyperliquid just three or four weeks ago—it remains one of the assets you’d want to hold this cycle. Coinbase’s proactive move reflects strong foresight, given Hyperliquid’s emergence as a central decentralized trading venue. Circle secures a meaningful recurring net interest income stream. It’s a win-win-win—particularly advantageous for Hyperliquid.
This circles back to another theme we’ve discussed: distribution ultimately drives most of the system’s economic value. Gordon, you’ve also called Hyperliquid the emergent perp DEX in crypto. All these players converging signals broad consensus around the centrality of distribution—and user positioning—a theme that will recur repeatedly when assessing winners and losers.
OpenAI Litigation
Austin Campbell: Speaking of users and winners: today, Elon Musk lost, Sam Altman won—at least round one. An Oakland federal jury unanimously dismissed all of Musk’s claims in under two hours. The verdict hinged on the three-year statute of limitations: the jury found Musk knew OpenAI had shifted to a for-profit model in 2021 but didn’t file suit until February 2024.
Musk originally sought $134 billion in “unjust enrichment,” plus removal of Altman and Brockman from leadership—citing OpenAI’s 2025 for-profit restructuring. But core issues—including alleged charitable trust breaches and unjust enrichment—were never adjudicated. Musk’s team has announced plans to appeal. Wired observed that both sides painted each other as self-interested in court—neither Musk nor Altman emerged unscathed. Interpretations suggest OpenAI may now proceed toward an IPO—at least during this transitional phase.
A few reactions on X are worth reading. Structural skeptics note: legally, this is a major OpenAI victory—but politically and institutionally, deeper questions remain unaddressed. What does it mean when an organization builds public legitimacy on a “nonprofit, human-first” mission—then becomes one of the world’s most valuable commercial platforms? News24 remarked: “A nonprofit machine founded to benefit humanity has forcibly pivoted into a closed, Microsoft-backed for-profit machine.” The trial indeed revealed broken commitments around openness and safety. Chris, your take?
Chris Perkins: The statute-of-limitations expiration seems decisive. I’m not sure how Musk’s lawyers will appeal—but they’re smart and will surely find a path.
At this juncture, Ram usually says something critical about OpenAI—he’d call this much ado about nothing. Before he does: a larger issue for crypto is that, due to four years of regulatory pressure, many funds have been structured as nonprofits alongside Labs. I hope this case sets a clear precedent clarifying the relationship between foundations and Labs. Today, protocol governance remains confusing—who’s responsible for what, who reports to whom?
I’m not saying foundations are useless—they absolutely advance non-profit ideals, like Ethereum’s cryptography research. But many foundations were formed partly to shield themselves from aggressive regulators. So this case will profoundly impact crypto. Sam is also increasingly active in our space.
Ram Ahluwalia: Chris, you’ve practically served this ball right to my racket. I never expected fireworks from this case—so yes, nothing happened. It’s much ado about nothing.
The tech world has its heroes and villains. I place many in the hero camp—and some in the villain camp—but that doesn’t negate their value creation. Sam’s issue? He has a documented history of signing contracts violating contract law. He even played this game with Microsoft—signing an Amazon agreement first, then renegotiating Microsoft’s deal. Microsoft extracted highly favorable terms as the price for funding OpenAI. Of course, Microsoft also sought 10x returns on its capital commitment to OpenAI.
In my view, Sam is clearly a villain. He was fired by a board he himself appointed—accidentally seeding his main competitor—and one employee died under suspicious circumstances during his tenure.
Chris Perkins: That’s a bit extreme.
Ram Ahluwalia: No—this is factual. “An employee died under suspicious circumstances during his tenure” is an accurate statement—the circumstances *were* suspicious.
Bottom line: this domain has heroes and villains—and I place him squarely in the villain bucket.
Austin Campbell: Gordon, your thoughts?
Gordon Liao: Broadly speaking, AI competition is fierce across every layer—and this courtroom battle is just one facet. But for listeners straddling blockchain and AI: where’s the opportunity? I believe it lies in building tomorrow’s rails—for Agents, for AI. That’s precisely what Circle has done: launching an Agent tech stack and our “Economic Operating System,” ARC. I believe these will generate durable network effects—comparable in strength to USDC’s. So even amid intense foundational model competition, abundant opportunities exist elsewhere in the value chain.
Chris Perkins: Competition is healthy—we need more of it. Nobody’s perfect—not even me. This is a brutal race. Let’s hope they keep innovating, creating value, and letting free markets prevail.
Austin Campbell: Let me pressure-test this: we’re litigating fiercely in court over OpenAI because private markets deem it among the most valuable foundational model companies. But long-term—could this trial be remembered as much ado about nothing? If distribution is where value ultimately accumulates, does value reside with OpenAI, Anthropic, etc.—or with platforms delivering models to users and collecting tolls?
Ram Ahluwalia: Definitely the latter. There’s virtually no value capture at the LLM layer. These AI labs spend tens of billions delivering free services to us—it’s public service. But Microsoft owns OpenAI’s IP—after six years, it can dispose of shares, but the IP is permanent. Microsoft can deploy that IP however it wishes—even publish it online (not saying it will, but it could). The LLM’s value is in its model weights—that’s IP. And that IP falls into the hands of a direct competitor.
So I support AI labs raising more capital to invest in humanity’s future—but their business models lack value capture. Meta brought in the “A-Team” (Ram references the 1980s TV series *The A-Team* and *Airwolf*)—its new models pack serious punch, and it’s spending heavily on NVIDIA GPUs. This race is still early.
Anthropic leads in the pack, with rapid revenue growth. Just today, Dell’s Michael Dell revealed they’ve signed 1,000 new enterprise clients. We’ve moved beyond an era dominated solely by hyperscale data centers and AI labs burning GPU cycles—into genuine commercial deployment. And we’re still early.
Whoever controls the end user delivers maximum value—primarily accruing at the application layer, cloud providers, and AI implementation services like Accenture.
Chris Perkins: I agree with the distribution argument—but I see this as a barbell. The other end is energy. Whoever secures near-free energy and cheap compute wins—and Elon holds an advantage here. Securing near-zero-cost energy in space isn’t easy science—but if anyone can pull it off, it’s the person who routinely launches hardware into orbit globally. That’s Elon’s unfair advantage at the stack’s deepest layer. But at the front end—distribution still reigns supreme.
Ram Ahluwalia: Apple hasn’t yet unveiled its full hand either. How many times has Apple descended late in a race to dominate? Recent internal turbulence makes this company worth watching.
Austin Campbell: Apple is an intriguing story here. While its “Mag 7” peers pour capex into model training, Apple appears to say: “We’re a vertically integrated hardware company—from iPhone and MacBook to servers and Mac Studio. We’ll be the endpoint for your model distribution—and we’ll collect tolls.” Look at what they’ve done with App Store, look at ecosystem bundling.
Incidentally, Chris—this circles back to your passion point: identity. Apple is among the few Big Tech firms that manage privacy “well enough”—making it more trustworthy on such issues. So one key divergence I’m tracking is: build your own AI—or deploy others’ AI and collect tolls? The latter is distribution.
Gordon—you lead a company shaping the “form” of money—and you’ve observed numerous cases where Agentic Commerce and financial firms intertwine with AI. How does this relate to modernizing the U.S. financial system—and adopting new financial products? A reminder for U.S. listeners: Asia rolled out 24/7 real-time gross settlement systems from the late 1990s to early 2000s. We’re already two decades behind. Could this accelerate renewal across the entire financial economy—not just AI?
Gordon Liao: Absolutely. Most transactions today involve human intermediaries—but many forecasts predict machine-to-machine, machine-initiated payments will dominate. Today’s large LLM companies are huge and important—but models evolve rapidly, and even open-source models aren’t far behind. So value will increasingly flow toward commodities, hardware, and the rails where Agentic Commerce unfolds.
Take micro-payments—we recently launched a micro-payment protocol: a marketplace where Agents browse, discover each other, and deploy optimal tools—even without human oversight—to execute machine-to-machine commerce. All of this runs on blockchain rails. We’re deploying ARC here—a massive growth area tightly integrated with finance. We’ll revisit CLARITY later—it’s the antithesis of balance-sheet-based intermediation and deeply connected to activity-based finance.
Austin Campbell: Let me offer a contrarian view. I often hear that agent payments will run on blockchain rails—but I suspect many will use traditional rails too. It’s trivial for an Agent to hold a credit card. So the winners may be those who seamlessly bridge disparate systems. That’s why I watch combos like Coinbase + Circle—or firms like Fidelity, which already offer money-market funds and cash management, and now plan to launch stablecoins.
Agents seem less “loyal” than human consumers—but excel at optimizing across diverse rails. Not all flows fit one framework—sometimes you need on-chain payments, sometimes card swipes, sometimes bank transfers. I suspect Agentic Commerce winners will be those enabling seamless interoperability across these layers. Theoretically, pure on-chain or pure off-chain solutions may lose to hybrid integrators.
CLARITY Act: Reaching “Hillary’s Step”
Austin Campbell: The Senate Banking Committee voted 15–9 along bipartisan lines to advance the Digital Asset Market Clarity Act (CLARITY) to the full Senate floor. Formal floor consideration requires 60 votes. Another open question: whether additional amendments will be proposed once the bill reaches the floor.
Core provisions include: a decentralization test, delineation of SEC and CFTC jurisdiction, and classification rules determining which agency regulates which tokens. Everyone agrees the bill is imperfect—but at least workable.
I’ll highlight two points. First: controversy over stablecoin yield. Consumers, retail users, and the crypto industry call it “working as designed”; banking lobbyists still label it a “loophole.” Senators Tillis and Alsobrooks struck a compromise: strictly passive yield is prohibited, but “activity-based rewards” are permitted. The American Bankers Association (ABA) is unhappy; other stakeholders are largely satisfied—and senators state the deal is “final.” Let’s discuss: assuming Tillis and Alsobrooks mean it, and the bill passes unchanged—what’s your read?
Gordon Liao: Let me start. Money inherently possesses multiple attributes: it’s a settlement tool and a store of value. In essence, this compromise separates money’s three functions—store of value, medium of settlement, and unit of account.
It also echoes a broader trend in financial intermediation. Traditional intermediaries rely heavily on balance sheets—hence banking regulations centered on stress-testing balance sheets. In that world, growing the balance sheet is paramount, matched by commensurate regulation. But on-chain finance evolves differently: much of it is activity-based—not measured by balance-sheet size, but by the set of activities mediated via smart contracts.
This compromise cleanly slices the boundary between old and new: from traditional, balance-sheet-heavy intermediation to new, smart-contract- and Agent-driven intermediation. Players focused on activity-based rewards, activity-based services, and novel intermediary forms stand to gain significantly.
Chris Perkins: I’d like to thank Senator Tim Scott, Senator Loomis—and commend Republican leadership overall. Special mention to Senator Gallego and Senator Alsobrooks. Gallego is a Marine—fought in Haditha while I was in Ramadi. He’s got courage—and ensured the bill carried bipartisan weight at the committee level. Excellent work.
We’re now approaching Hillary’s Step—the final, most treacherous stretch before Everest’s summit. Committee seat allocations remain unresolved; ethics questions linger—and that ethics hurdle will be exceptionally tough. Banking dissatisfaction persists. Banking lobbyists are still invoking national security—perhaps reflecting frustration with other provisions. Progress toward the finish line will be arduous.
Yet I remain confident the bill will pass. I’d love your perspectives—our views have diverged before.
Ram Ahluwalia: I think it will pass narrowly. What did Trump do? He tweeted about CLARITY, pledging to back it. With midterms approaching, failing to pass it offers no upside. I still expect narrow passage.
Austin Campbell: I’m more skeptical than either of you. Reaching the floor is undeniably positive—regardless of prior probability estimates, that threshold now demands an upward revision. But Chris—no one has yet offered me a truly credible solution to the “ethics problem.” I see two possible paths: one is short-term beneficial but long-term disastrous—CLARITY passing along purely partisan lines in both House and Senate. That’s feasible under current frameworks. But if only Republicans pass it, it risks becoming like the Affordable Care Act—immediately dismantled upon the opposition’s return to power. Forcing transformative legislation through a one-sided partisan lens has historically yielded poor outcomes in U.S. legislative history.
The second path is the bill sinking outright on the ethics reef. If it dies, this is where it dies. Every other issue—including banking’s yield objections—has viable solutions. Many arguments boil down to industry-specific petitions, harmful to ordinary consumers, the U.S. economy, and national security agencies—whose growing interest in digital assets is increasingly positive. Ethics is the sole remaining concern after conversations with stakeholders across the spectrum. So I’m applying the brakes.
Ram Ahluwalia: Austin, what’s the precise ethics sticking point?
Austin Campbell: The crux is whether Democrats will vote for a bill that doesn’t force the Trump family to divest World Liberty Financial, meme coins, and related interests—and whether Republicans would send such a bill to the President’s desk. That’s the break point. I see no elegant solution. But Chris is right: reaching the floor makes things unpredictable. It has a non-zero chance of advancing—perhaps via an unrelated compromise, exchanging other levers.
Ram Ahluwalia: Distinguishing between yield and “activity” is a clever design—I like it in principle. But how many edge cases can activity-based regulation accommodate?
Chris Perkins: We now live in a “post-Chevron deference” era—the Supreme Court overturned Chevron, meaning courts no longer automatically defer to regulatory agencies’ interpretations. Previously, “if rules were unclear, regulators filled the gaps.” Now legislation must be rigid and prescriptive—resulting in worse-written bills. Disputes inevitably land in court. In some ways, retiring Chevron was necessary—but it had merits too. I’m not advocating its return—just noting complexity has risen.
Austin Campbell: Let me add another angle: this is fundamentally a Gordian knot rooted in structural flaws across U.S. financial regulation. To prevent money-market funds from paying yield, you’d need to rewrite the 1940 Investment Company Act—they’re legally mandated to distribute returns to clients, not compound internally. As long as we have tokenized securities on one side and stablecoins whose reserves resemble tokenized securities on the other, that door remains open. It’s a form-over-substance issue. Otherwise, you’d need to rewrite the Banking Act and the 1940 Act. I doubt Congress has the appetite.
They nearly failed to confirm Warsh—just placing one person in one chair for one job. Expecting them to rewrite the bedrock of U.S. securities regulation? Impossible. So from day one, I viewed banking’s campaign as quixotic—what are they really after? Is this mutual sabotage—or handing a gift to asset managers?
Chris Perkins: Senator Gillibrand is now one of the most critical figures to watch. She supports crypto and has been deeply involved since the earliest legislative drafting—but her stance on ethics is uncompromising. Any agreement with her would carry immense influence.
Bond Vigilantes vs. Fed Chair Warsh
Austin Campbell: Warsh is the closest-vote Fed chair in modern history. His first FOMC meeting is mid-June—but hours after confirmation, a $25 billion 30-year Treasury auction cleared above 5%. The 30-year yield hit 5.12% intraday—the first “five-handle” since the 2008 financial crisis. The 10-year sits at 4.59%; the 2-year at 4.08%. CME FedWatch shows a 50% probability of a rate hike later this year—fully reversing prior dovish narratives. Of course, interpreting this data isn’t linear—it’s not a simple hike signal.
Ed Yardeni—who coined “bond vigilantes”—says they’re now setting policy, forcing the Fed to hike in July. Vincent Ahn of WisdomTree notes Warsh wants to preserve the option to cut rates on Day One—but bond markets just removed that option from the table. Morgan Stanley forecasts rate cuts delayed until 2027. Ryan Swift of BCA warns: if Warsh turns dovish amid this rout, inflation expectations will de-anchor—and the Fed will lose control of long-end yields.
Others see upside. Phil Blacanto of Reuters Breakingviews argues evaporating rate-cut expectations may rein in an over-interventionist Fed—a net positive. But rates occupy a complex domain—often misread even in traditional markets. Gordon, as an economist, market observer, and former Fed insider—what’s the market saying?
Gordon Liao: I’ll answer from my background. I formerly worked at the Federal Reserve Board in Washington—and in that role, your first question upon seeing rate moves is always: “Is it term premium moving—or expectations of short-term rates?”
Using the classic ACM model, most of the 30-year yield rise is term-premium driven. Term premium now stands at ~80 bps—significantly elevated versus two years ago, when it was negative. Term premium reflects supply-demand dynamics; expected short rates reflect market views on Fed hiking/cutting.
Yield rises driven by term premium signal several demand-side developments: persistent fiscal deficits and expansion; waning confidence in the Fed’s ability to control inflation long-term; and weakening foreign demand—international balance-of-payments shifts have been notable over the past year.
Supply-side dynamics are interesting too. Incoming Chair Warsh supports shrinking the Fed’s balance sheet—i.e., reversing QE. That aligns precisely with rising long-end yield pressure.
Another narrative: stablecoins are marginal buyers of Treasuries. I find this more substantiated than commonly credited—not just because stablecoin supply is rising, but due to duration structure. Stablecoins hold ultra-short-dated assets—freeing up Treasury issuance capacity at the short end.
Duration-weighted calculations show significant dollar-duration reallocation—reducing long-duration dollar supply in the market, potentially easing current yield pressure. These forces are interconnected. Don’t view rates as a single number—decompose them into term premium and expected short rates—and layer in balance-sheet considerations: anticipated Fed balance-sheet shifts and private-sector demand.
Austin Campbell: You highlighted a crucial point people overlook: it’s not just *who* buys Treasuries—but *which maturities* they buy. Constrained by the GENIUS Act, stablecoins prefer short-dated Treasuries. Even absent that preference, their repo activity uses Treasuries as collateral—but longer-dated bonds face higher haircuts, reinforcing short-end bias.
Meanwhile, the largest buyers of 30-year Treasuries are insurers and sovereign wealth funds—and their preferences are shifting: sovereign funds reduce long-Treasury holdings, possibly for geopolitical reasons; insurers’ demand tracks demographic curves in their home countries. As baby boomers exit and millennials enter, insurance liability curves deform—potentially reducing 30-year demand.
So I’m watching term premium closely. Gordon, you noted 80 bps is relatively high recently—but versus true historical norms, it’s still low—peaking at 150 bps or more. The term premium curve itself is morphing—a neglected aspect of this story. Ram, from an investment lens—how do you view long-end Treasuries?
Ram Ahluwalia: First, I agree it’s supply-demand driven. Investors are simply saying: “I need more compensation to hedge rising inflation risk.” That’s it. They know the Fed isn’t inclined to cut—so someone must give ground, and the mechanism is higher rates.
You see inflation re-emerging via oil’s impact on memory prices, gasoline, etc. It’s ironic Warsh’s confirmation vote was so lopsided. Elizabeth Warren’s core litmus test was: “Will you cut rates?” This guy wanted to cut—so the vote was more political signaling.
Overall, I expect rates are peaking. If so, rate-sensitive sectors battered recently—like insurance—will rebound. Insurance is a balance-sheet business, akin to banking. Rising rates erode bond holdings’ value—and discount future liabilities’ present value. Hence their prolonged pressure.
But the most intriguing shift over the past two days: long-duration, high free-cash-flow assets began rebounding. Major indices fell >1%—but long-duration, high-FCF assets rose. Equity markets signal belief in falling long-end yields. It’s fascinating—usually bond markets are seen as equity market subsets, but this time equities may be right. Warsh’s confirmation feels like a surrender event. We’re still missing Ray Dalio’s viral “endgame” video—that’s pending.
Chris Perkins: Let me interject. Long-term, powerful deflationary pressures loom—first, AI; second, energy prices. Investment in cheap energy is staggering. Elon will push compute into space—yielding unprecedented on-orbit processing power. These are structurally deflationary. Warsh himself has acknowledged this—especially regarding AI.
The challenge is short-term. Sovereign funds sell Treasuries—some to decouple, some for liquidity needs. Oil prices are high for reasons. This administration differs from any postwar one: first, it’s re-examining how inflation itself is measured; second, Treasury-Fed coordination under Bessent is unprecedented. I believe this collaboration yields more holistic policy responses. That doesn’t undermine Warsh’s independence—you can be both independent and collaborative—and I think he should be. So I’m optimistic here.
Finally, geopolitics can deteriorate or improve rapidly. I think it improves—midterms approach, and Americans dislike the current state. It’s hard—but I suspect Trump leans toward de-escalation over escalation.
Austin Campbell: Time’s up—thank you all immensely for joining today. The timing couldn’t be better. Hope listeners gain valuable insights from your perspectives.
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