How Tokenized Treasury Funds Move Yield Onchain

Tokenized Treasury funds have disrupted the traditional fixed income market by bringing it online. But what really happens when the yield moves onchain, and how do fees, frictions, and risks stack up at each step? To understand this complex process, let's map out the plumbing.

The rate of return in tokenized Treasury funds originates from short-term U.S. Treasuries and repo, which drive the gross rate. The duration is tiny, reinvestment is frequent, and policy changes pass through quickly.

However, different wrappers pay out yield in distinct ways: rebases, NAV drift, or separate reward flows. Tokenized money market fund shares (MMF), direct T-bill tokens, and synthetic yield tokens all have their own mechanisms for distributing yield to investors.

Settlement rails are also crucial, as delivery versus payment on permissioned ledgers and tokenized cash are moving to production with big institutions, shrinking counterparty gaps. Access and liquidity are critical factors to consider, as KYC-only funds can be safer but less liquid, while new facilities aim to bridge to stablecoins after hours, tightening basis spreads.

One of the main leakages is management fees, mint-burn spreads, chain gas, custody costs, and slippage. Smart contract and legal risks sit on top. Despite these challenges, tokenized Treasury funds offer attractive use cases, such as parking idle cash, collateralizing loans, or building basis trades.