As of November 17, 2022, Circle Yield is not accepting new loans. We are evaluating future updates to the program.
Many businesses in the financial industry and beyond hold significant cash balances in their reserves. Banks, pension funds, credit unions and hedge funds are likely candidates, and many other businesses often build substantial reserves from cash flows in excess of their cost and capital expenditure needs.
Managers at these institutions often have to balance two things. On the one hand, inflation risks can lead to loss of purchasing power of their cash reserves. But investing all the funds in the stock market or other volatile asset classes may also not be a desirable option, given the increased exposure to risk.
Fixed-income investments are typically seen as lower-risk investment options that prioritize cash flow and capital preservation over asset value appreciation. Investments in fixed income are an important tool for many financial businesses, and are useful for treasury management purposes at a wide variety of companies.
Treasury bills, municipal and corporate bonds, money market securities, bond mutual funds, and fixed-income ETFs are some popular fixed-income instruments available on the traditional market. By providing liquidity to businesses, they serve an important role in the modern economy.
Fixed-Income Investing Considerations
Since they provide a stream of interest income and return the principal investment upon maturity, fixed-income investments may be preferred by more conservative investors concerned with volatility. Institutional investors can use fixed-income investments for capital preservation, risk management and liquidity.
Mutual funds, pension plans, and insurance companies may have substantial funds to invest, but generally maintain a higher aversion to risk compared to other investors because their capital is also routinely needed to pay claims, return funds withdrawn by mutual investors, or otherwise operate the business. Many portfolio managers at these institutions traditionally allocate a significant proportion of their assets to fixed-income investments.
Circle Yield* is a fixed-income investment that generates returns based on demand for USD Coin (USDC), one of the world’s fastest growing dollar digital currencies, fully backed by cash and short-dated U.S. government obligations so that it is always redeemable 1:1 for U.S. dollars. Market makers, trading firms, and other participants in the blockchain ecosystem are currently willing to pay higher interest rates than those found in traditional borrowing arrangements to access scarce on-chain stablecoin liquidity; those rates are passed onto Circle Yield users, with interest income paid each month during the loan term.
Advantages of Fixed Income
One advantage of fixed-income investments is that they typically offer decreased exposure to volatility risk compared to other investments, like stocks. By way of example, bonds backed by governments and issued by AAA-rated companies are arguably some of the safest investment opportunities on the market.
Allocating a portion of a fund’s cash reserves to fixed-income investing can help provide a safety net, should other growth-focused investments perform below expectations. This is a core aspect of an investment strategy based on a diversified portfolio that in aggregate helps reduce overall risk.
Traditionally, investing in fixed-income products has often provided higher rates of interest income than the relatively low rates offered by bank savings accounts/deposits. This interest income can be attractive to institutional investors and fund managers looking for options to reduce purchasing power that might have been lost to inflation.
Likewise, investments in Circle Yield can provide higher rates of return than other options for fixed-income investing, like Treasury notes or municipal bonds1. Circle Yield investments are available for terms of one, three, six, or twelve months, enabling institutional accredited investors to optimize returns on idle treasury.
Risks of Fixed Income
Not all fixed-income investments are alike in terms of risk exposure. Some of the risks associated with fixed-income investments include:
- Default risk
Treasury bonds from the US government typically offer the least default risk. But the same cannot be said about corporate bonds, especially those belonging to entities with lower credit ratings.
These bonds, often referred to as junk bonds, typically offer a higher than average interest income, while carrying a heightened risk of default. Even major companies can experience issues in certain circumstances, potentially leading to a default or a decrease in bond valuations.
- Interest rate risk
Changes in interest rates may affect the market value of fixed-income securities. Should an investor wish to sell the instrument before its maturity, this might result in loss.
- Inflation risk
During periods of high inflation, fixed-income investments may struggle to generate real returns, particularly if they are not inflation-adjusted. Inflation may also impact the value of fixed-income products bought and sold in secondary markets.
- Liquidity risk
In instances where businesses or funds make substantial investments in fixed-income securities, they may be at risk of not being able to access sufficient liquidity to meet their working capital requirements. Liquidity risk also applies to the ability to buy or sell fixed-income products quickly and at a price close to the underlying value. Low liquidity in secondary markets can make it difficult or impossible to sell some fixed-income securities, or could force sellers to accept a lower price.
A New Option: Circle Yield
Fixed-income investments may offer lower asset value appreciation compared to high-growth stocks and mutual funds, particularly in low interest rate environments. But they have an important role to play in balanced and conservative investment strategies, especially for institutional investors.
Institutional investors looking for short-term fixed-income opportunities that offer meaningful returns have few options in the current market. In this climate, looking at innovative solutions like Circle Yield can offer institutional accredited investors the predictability of fixed income while also earning returns greater than those found in traditional financial markets like Treasury notes or municipal bonds. Investment professionals and fund managers looking for high-interest, short-term fixed income opportunities with good income potential have few options remaining in the traditional markets. In this climate, it might be a good idea to look at innovative options like Circle Yield.
Invested capital benefits from the stability of USD Coin (USDC) while generating higher returns than those typically achieved through traditional fixed-income products, all without having to directly hold crypto assets on the balance sheet.
1 "United States Rates and Bonds", 05/04/2022, Bloomberg
* Offering subject to business approval, geographical availability, and regulatory authorization, and there is no guarantee that the product will become available in a specific timeframe or to a specific customer or geography. Circle Yield product offered through Circle International Bermuda Limited (“Circle Bermuda”). Circle Bermuda has entered into lending arrangements with one or more institutional borrowers, including Genesis Global Capital, LLC. These borrowers pledge and transfer Bitcoin into custody with a third party custodian as collateral for their USDC borrowings and Circle Yield investors benefit from a security interest in Circle Bermuda’s security interest in the pledged Bitcoin.
Circle Account and money transmission services are provided by Circle Internet Financial, LLC. Circle Internet Financial, LLC, NMLS # 1201441, is a licensed provider of money transmission services. Circle Bermuda is licensed by the Bermuda Monetary Authority and holds a Bermuda Digital Asset Business (DAB) License, No. 54786. A full list of Circle’s licenses can be found at https://www.circle.com/en/legal/licenses.
Circle is not a bank; your Circle Account is not a bank account, and any funds are not insured or protected by government compensation and/or regulatory protection schemes by the Federal Deposit Insurance Corporation, the Securities Investor Protection Corporation or by any US or foreign government agency, insurance fund, person or entity. For investors in the United States, investments described in this communication are offered by Circle Bermuda to “accredited investors” only in accordance with Regulation D, Rule 506(c) of the Securities Act of 1933, as amended. Neither the SEC nor any other regulatory body has approved or disapproved Circle Yield. While Circle Bermuda is regulated by the Bermuda Monetary Authority for digital asset business, Circle Bermuda is not engaged in banking and deposit taking activities and is not regulated for these purposes. You should carefully conduct your own investigations and analyses in connection with any participation in this product, including its objectives, risk factors, fees and expenses and the information set forth in these materials. All prospective participants in the products described herein are advised to consult with their legal, accounting and tax advisers regarding any potential participation. Tax may be payable on any return on and/or any increase in the value of your investment and you should seek independent advice on your taxation position. Please read the offering documents carefully before you invest. Additional information is available upon request.
Not currently available in the following U.S. states: Alaska, New York and Hawaii.
