Fixed rates for stablecoins on Term dropped sharply down to 8.5% fixed for a four-week term, consistent with a steep drop in perpetuals funding rates. A quick rebound in rates as was the pattern in Q1 never materialized. In ETH markets, Term demand to borrow against weETH continues to grow with requests to borrow USDC against weETH - currently in the works. As a side note, an unexpected drop in demand to borrow against wstETH this week turned into a windfall for lenders into Term’s bomb-pot auction this week resulting in a net implied APY of 39%+!
Futures and perps basis implied funding rates fell steeply with perp funding rates accelerating -5.07% on the week to the downside, while 3-mo basis stabilized followed suit declining by -0.95%.
DeFi rates continue to move in line with derivatives funding rates, though at a slower pace causing the passthrough rate to rise.
In the variable rate DeFi markets, USDC borrow rates continue to fall on the week, declining by -111bps from 12.79% to 11.68% on a 30-day trailing basis.
Consistent with falling rates and declining borrow demand, intraday volatility remained muted over the course of the week.
Turning to ETH lending markets, rates on Aave V3 continue to bleed to the downside, closing down -3bps on the week at 2.46% down from 2.49% the week prior on a 30-day trailing basis. Consistent with Aave borrow rates, CESR staking rates continue to leak falling -6bp on the week from 3.46% down to 3.40% on account of continued staking inflows.
Notably, utilization of ETH supply on Aave took a nosedive down toward 70% after holding in around 80% over the past few weeks.
While the week-on-week declines in ETH borrow and CESR rates have been relatively muted, the declines in ETH rates over the past three months has been quite notable in the aggregate. Since January 1, ETH borrow rates are down -38bps (or -13.5%) and CESR rates are down -76bps (or -18%). The LRT narrative, which is responsible in large part for the ongoing staking inflows that suppress staking yields appears to be set to continue. As ETH rates continue to decline due to staking inflows to capture LRT points/airdrops, regular way ETH stakers will be forced to reach for yield through re-staking to compensate for declining returns. Eigenlayer restaking narrative is in many ways becoming a self-fulfilling prophecy.
Next week brings the much awaited halvening event, though the stage appears to be set for it to be a nothing-burger event. With oil and commodity prices breaking out to the upside, threatening the ground gained in the fight to reduce inflation, it appears that odds of a rate cut cycle is beginning to get priced out of the market. Ukraine’s recent attacks on Russia's oil refineries is only adding fuel to the fire (no pun intended). In the near term keep an eye on oil and commodities prices as these threaten to derail the rate cut cycle that has been a primary driver of the risk on environment of the past few months.
