Currently, several billion in value is locked into Defi-based liquidity pools with USDT. If USDT collapses tomorrow, the stakers will lose nearly all of their principal. (Fast traders will quickly swap worthless USDT for all the USDC in the pool, before hardly anyone has time to remove liquidity.)
The largest of these pool, currently pays about 2.6%.[1] Even if all of that return reflects USDT credit risk, that market implies a 1/50 chance of USDT collapsing within the next year. I'm not saying the market is necessary correct. But what I am saying is that very deep, liquid markets are not pricing any significant USDT risk.
If you really disagree, you can even short USDT, by borrowing USDT on Compound at 4.2%. Then use that to buy USDC and supply it on Compound at 4.9%.[2] If USDT collapses, you'll make nearly 100% as you'll only have to buy back now worthless USDC. In fact the market will even pay you take this position, with the only risk being if USDC collapses relative to USDT.
[1]https://www.curve.fi/3pool [2]https://compound.finance/markets
This trade involves risk, and not just the direct USDT risk. If it didn't, there's no particular reason multi-billion dollar hedge funds wouldn't buy this down to the yield of an equivalent US treasury or similar.
This is true in theory but in practice it seems much more commonly false. Even in vastly more mature and liquid markets, straightforward arbitrages can persist for years and in some cases decades, even after an inefficiency becomes public knowledge
What I'm not sure is how that market connects to Tether's bank accounts increasing or decreasing in holdings. This is all third-party exchanges, presumably with other customers as the counterparty.
Then what is your explanation for why it is not possible to directly exchange USDT for USD, there must be a reason that no exchange wants to do that.
> that most of the market doesn't perceive a risk.
That is absolutely no indicator for safety.