Term saw a busy week, clearing over $6.5M in USDC and over 1,000 ETH. Rates were down slightly this week, consistent with prevailing borrow rates on the variable rate lending protocols. Pendle PTs remains the most popular collateral type on the stablecoin side, while on the ETH side, Term saw borrow demand against tETH drop in favor of borrow demand against ETH+.
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In derivatives markets, funding rates accelerate to the downside, with 3-month basis falling by -135bps to 9.96% and perpetual funding rates falling by -171bps to 7.02% on a 30-day trailing basis.
With floating rate protocols slow to adjust base rates, DeFi rates continue to remain elevated as compared to derivatives funding rates at the higher end of the historical range. Though this is slated to change next week.
With perpetual funding rates printing negative over at least one or two days this past month, bearish sentiment may be approaching an extreme. Historically, negative rates don’t last long outside of a crisis. Keep an eye on funding rates as a proxy for market sentiment over the next couple of weeks.
Turning to DeFi variable rate markets, floating rates accelerate to the down side, closing down -76bps on the week to 9.99% on a 30-day trailing basis. Over a shorter lookback period (just seven days), Aave rates averaged 8.50% on the week, foreshadowing further declines ahead.
Diving in the microstructure of Aave USDC markets, utilization continues to decline rapidly, hitting a nearly two-year low of 62% as of the time of writing. In contrast to the past two weeks, this week’s decline was driven predominantly by the demand side, which dropped by -280M over the past week.
With utilization at two year lows Aave is following Sky’s lead with a proposal to reduce the base rate from 11.5% to 9.5%, in line with sUSDS executive vote to reduce the savings rate to 8.75%.
With so much unutilized idle capital sitting on Aave, Aave suppliers are now earning LESS than 60% of the yield paid by borrowers with the spread between supply and borrow rates widening out to 337bps.
Expect things to normalize some once the base rate change is implemented over the next few days.
Turning now to ETH markets, ETH rates reverse higher, with borrow rates rising +6bps to 2.61% on a 30-day trailing basis. This jump closes the gap between Aave ETH rates and the CESR index, which closes flat at 3.15% on a 30-day trailing basis.
Market internals show that ETH supply and demand remain roughly balanced, rising in lockstep while maintaining a healthy utilization level between 80% and 90%.
Overall, intraday volatility has picked up some over the past week, with rates reaching a peak of 6.11% on Tuesday, suggesting further increase ahead.
With perp rates dipping as low as -14% last week, it is no surprise that ETH borrow demand is up. Borrowing ETH to go short ~2.6% is much better than paying -14% to hedge delta using perpetual swaps!
Headlines early this week around tariffs on Canada and Mexico have the market on edge. While the “trade war” is on 30 reprieve, it is far from over. While this by no means suggests a change in the general upward trend / bull market, it certainly means that it promises to be a bumpier ride. It is hard to justify high leverage when ETH can sell off 25% and rally back in less than 24 hours on a headline and thus it is no surprise that borrowers are beginning to deleverage both in CeFi and DeFi.
