In the world of finance, few systems are as intricate as the flow of funds between bank deposits, U.S. Treasuries, and emerging assets like stablecoins. Like any complex system, multiple variables interact and counterbalance each other, often in unexpected ways. Over the past few years, we've witnessed significant shifts driven by interest rate divergences, banking crises, and monetary policy changes. Today, as of July 30, 2025, with the Federal Reserve holding its benchmark rate steady at 4.25% to 4.5% for the fifth straight meeting, these dynamics continue to evolve. This post looks at how in the 2020’s bank deposits fled to safety and higher yields from Treasures. Now stablecoins may cause a further flow of bank deposits into Treasuries (used to back stablecoins), but that “non-economic” flow could reduce Treasury yields causing a flow of funds back into bank deposits to chase yield. This could result in lower rates across the board, acting as an economic stimulus. I know, sounds complicated but I’ll do my best not to over-complicate it.
In the 2020s, we saw a growing spread between average bank certificate of deposit (CD) rates and U.S. This spread simply means that Treasuries paid higher interest than CDs. When this spread widens in favor of Treasuries, meaning Treasury yields exceed CD rates, it makes government bonds more attractive to investors seeking safe, higher returns. This divergence accelerated in the early 2020s as the Fed hiked rates to combat inflation, pushing Treasury yields up faster than banks adjusted their deposit rates. Investors seeking better yield moved their money out of CDs and into Treasuries.
For instance, in 2023, the average 1-year CD rate was around 1.62%, while the 1-year Treasury yield averaged 4.93%, creating a spread of 3.31%. As of July 30, 2025, the gap persists: The 1-year Treasury yield stands at approximately 4.07% to 4.09%, while the national average 1-year CD rate is about 2.03%.
Of course, when the funds flow out of bank deposits and into Treasuries, this constrains bank lending and causes loan rates to increase which suppresses the private economy.
The significant exodus from bank deposits began in mid-2022, coinciding with the Fed's rate hikes. Deposits peaked at about $18.15 trillion in April 2022 before declining. By end of 2022, banks lost $300–$400 billion in deposits to money market funds (MMFs) and Treasuries. In March 2023, following the collapses of Silicon Valley Bank and First Republic Bank, outflows surged past $400 billion in a single month as depositors sought safer havens. Overall, deposits dropped by about $1 trillion from the 2022 high to a trough of $17.16 trillion in May 2023. MMFs absorbed much of this, with inflows of $1.2 trillion pushing their assets to $6.4 trillion by year-end. Deposits currently sit at $18.2 but MMF assets have hit a record high of $7.07 trillion.
Looking ahead, stablecoins could introduce a powerful counterbalance. Backed predominantly by Treasuries, stablecoins create a "non-economic" bid for government debt. If the stablecoin market hits $2 trillion by 2028, as some predict following passage of the GENIUS Act this could have a significant impact on the money flows. This would amplify demand for Treasuries, potentially lowering yields further and narrowing the spread with CD rates.
Purchases of Treasuries by stablecoin issuers creates a giant persistent bid for short-term Treasuries, pushing prices up and yields down; typical supply-demand forces. In response, banks could lose deposits directly to stablecoins and then indirectly to Treasuries. To compete for deposits, banks would raise their CD and savings rates, potentially inverting the spread: meaning CDs pay higher interest rates than Treasuries. This would stimulate a counterflow back to deposits by yield-seeking investors. This influx could boost lending, cut private-sector borrowing costs, and mimic QE effects. Stablecoins might initially pull funds from banks, but yield-seeking could offset this to some degree.
While plausible, this scenario faces challenges. The U.S. Treasury market is colossal, around $27 trillion, so stablecoin demand, though potentially massive, would be secondary to Fed policy, which can overwhelm it. While price is set on the margin, the recent trend has been China and Japan selling treasuries, so even if stablecoin issuers represent persistent buyers, on balance it may not lower treasury rates at all. In that scenario deposits could continue to seek yield in treasuries, depleting banks’ ability to lend into the private market.
In this ecosystem, stablecoins act as a double-edged sword. On one hand, their Treasury demand benefits public-sector borrowing by providing a non-economic bid for treasuries. On the other, if China and Japan continue selling, they may offset this downward pressure on yields. Yet, as the old saying goes, "the cure for high prices is high prices." If Treasury yields do drop due to stablecoin demand, the appeal diminishes, prompting funds to seek higher yields in MMFs or CDs, and potentially back into the banking system.
This interplay highlights finance's self-correcting nature. Variables like rate policies, banking stability, and crypto regulation will determine the balance. For investors, monitoring the CD-Treasury spread remains crucial. As stablecoins scale, they could have a big impact on fund flows, but these flows tend to self-correct as investors pursue yield.
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