Stablecoin rates continue to tick up on Term this week, with USDC rates clearing around 8.75% for four weeks fixed, up +40bps from the week prior and +75bps from the week before that. On the ETH side, rates continue to decline with rates against etherfi’s weETH dropping down to 7.25%, down from 10.1% and 12.5% in the two weeks preceding. These declines are likely due to a combination of both lower expected returns (as evidenced by PT yields ~15% down from ~30% when they first launched) and increased ETH borrow supply on Aave and Morpho.
In TradFi, G7 rate cut cycles appear to be kicking off with the Bank of Canada and the ECB leading the way. Crypto assets saw a nice rally back toward cycle highs on the back of this news. As a result, derivatives funding rates remained elevated this week with 3mo basis and perp funding rates hovering between the low-teens to low-twenty percent range. Implied rates on a 30-day trailing basis for 3mo basis and per funding rose +142bps and +216bps week over week, respectively. Implied funding rates close the week at 15.03% (perps) and 14.39% (3mo basis).
The ratio between DeFi rates and derivatives rates are beginning to fall back toward the lower end of its range, though there still appears for further room to the downside. It is not atypical for DeFi rates to lag derivatives rates on the upside.
In the variable rate DeFi markets, USDC borrow rates are beginning to show signs of life, rising +33bp from 8.61% to 8.94% on a 30-day trailing basis.
The hallmarks of rising DeFi rates in the form for utilization driven intraday rate spikes are beginning to reappear on Aave. In the past week, Aave USDC rates got as high at 40%! intraday and closes the week at 13.82% borrow rates.
While higher utilization rates typically lead to tight spreads, borrow/lend spreads on Aave remain relatively wide at just above 200bps (on a 7-day trailing basis).
ETH rates on Aave V3 are also beginning to rise again, closing the week +4bps week over week at 2.38% up from 2.34% the week prior. This uptick is consistent with rising CESR index rates that show staking returns up +7bps on the week.
Looking into market internals, its apparent that utilization is back up and currently hovers back around its long run average of ~80%.
While today’s NFP payrolls beat put a damper of rate cut expectations in the U.S., it seems to be a small bump in the road. The Fed’s peers in Canada and Europe cut rates by 25bps each, for the first time since Covid19. And while today’s NFP beat was not favorable to this outlook, odds of a rate cute remain relatively unchanged week over week. In crypto markets, everyone awaits the launch of ETH ETFs, which promise to bring significant demand to the market. Derivatives funding rates suggest that crypto native traders are positioning long going into that trade. Given this backdrop, the widening spread between derivatives and DeFi money market rates, and the return of intraday utilization driven swings on Aave, expect rates to rise in the near to medium term. Strong borrow demand on Term to lock in fixed USDC rates against wBTC in the past few weeks certainly suggest that Term borrowers hold a similar view.
