Ondo Finance token at risk if Fed begins cutting rates

The Ondo Finance token retreated by over 6% on Tuesday as traders focused on the upcoming U.S. Consumer Price Index (CPI) data.

Ondo (ONDO) was trading at $0.7345, down 50% from its highest point this year, bringing its market cap to $1 billion.

The biggest macro news of this week will be Wednesday’s U.S. CPI data, which is crucial to the Federal Reserve’s dual mandate.

The average estimate among economists is that the headline CPI rose from -0.1% in June to 0.2% in July, while the core CPI moved from 0.1% to 0.2%. If these estimates are accurate, it will break a three-month trend where inflation had been retreating.

The CPI is expected to remain steady at 3.0%, while the core CPI is projected to have slightly decreased to 3.2%. These figures are still above the Federal Reserve’s target of 2.0%, suggesting that inflation is proving more stubborn than expected.

Despite this, the Fed seems to be taking a labor-first approach, focusing on the deteriorating job market, with the unemployment rate rising to 4.3%.

As a result, the odds of a Fed rate cut in September have increased in recent weeks. The debate now centers on the size of the cut, with the CME FedWatch showing a 51% probability of a 0.50% cut and the remainder predicting a 0.25% reduction.

Ondo Finance is exposed to Fed cuts

Federal Reserve interest rate cuts will impact all cryptocurrencies and stocks, but Ondo Finance may be particularly vulnerable due to its business model, which relies heavily on interest rates.

Ondo provides a tokenization platform where investors can purchase U.S. Dollar Yield (USDY) and U.S. Treasuries assets (OUSG). Holders of USDY and OUSG earn rewards every month.

USDY has an annual return rate of 5.35%, while OUSG yields 4.96%, making them more attractive than traditional stablecoins like Tether (USDT) and USD Coin (USDC). These yields are generated by investing in bank deposits and short-term U.S. Treasuries.

Ondo Finance’s assets have grown, with USDY and OUSG holding $342 million and $226 million in assets, respectively. However, recent data from DeFi Llama shows that the rate of growth has slowed.

Given this, Ondo’s ecosystem could shrink when the Fed starts cutting interest rates, as investors may seek higher-yielding assets elsewhere.

This trend is also expected to affect the broader money market fund industry, which has accumulated over $6.1 trillion in assets as investors capitalize on higher interest rates. Nevertheless, USDY and OUSG tokens are likely to remain more appealing than Tether and USDC, which don’t pay interest, suggesting that any outflows might be gradual.

There is often a disconnect between a blockchain’s fundamentals and its token price. For instance, Arbitrum (ARB) has a market cap of $1.9 billion while Cardano (ADA) is valued at $12 billion. Arbitrum has a highly engaged ecosystem, with its DEX platforms having the third market share after Ethereum and Solana. Cardano, on the other hand, does not have an active ecosystem in DeFi and other industries. 

Given this, there is a possibility that the Ondo Finance token could rebound even if investors start moving out of its USDY and OUSG assets.