Stablecoin rates continued to tick up on Term this week, with USDC rates clearing around 9.00% for four weeks fixed, up another +25bps from the week prior. On the ETH side, rates held steady with weETH rates stabilizing around 7% and ezETH continuing to attract the highest bids from borrowers to clear at 15% for a three month term.  

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Variable Rate Markets

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Basis and Perpetuals Markets

In derivatives markets, implied funding rates on a 30-day trailing basis for 3mo basis and perps rose +112bps and +10bps week over week, respectively. Overall implied funding rates appear to be finding an equilibrium around the +12% level

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This recent stabilization of derivatives funding rates has given DeFi money markets a chance to catch up. DeFi rates now stand at roughly 73% of the 3mo Basis rate, which is above average. So long as crypto markets continue to trade rangebound and derivatives funding markets remain stable, expect DeFi borrow rates to remain capped below the 12% level.

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USDC Markets

Turning to the DeFi variable rate market, USDC borrow rates continue to march up consistent with Term auctions, rising +48bp from  8.96% to 9.44% on a 30-day trailing basis.  

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Intraday spikes well into the double digits continued to surface on Aave over the past week, with utilization hovering at or above the 90% kink throughout the week.

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Of note, is an interesting pattern that has emerged over the past four weeks (since Aave’s stablecoin rates were adjusted down to 9% from 12%) where borrow demand spikes (temporarily) on Thursdays and Fridays. The chart below shows average supply, borrow and intraday peak borrow rates for each day of the week, over the past four weeks. No reasonable explanation for this pattern has been identified as of yet, but it appears to be a phenomenon worth keeping an eye on.

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ETH Markets

Turning to ETH rates on Aave V3 , ETH rates close the week flat to slightly higher, with the 30-day trailing rate closing +2bps week over week at 2.40% up from 2.38% the week prior.  This uptick is consistent with rising CESR index rates, which rose +6bps on the week.

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Looking into market internals, supply and borrow utilization remain steady and suggest no signs of disequilibrium.

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Looking forward

The lack of follow-through on BTC and ETH prices through cycle highs and a hawkish FOMC meeting that now projects only one rate cut in 2024 has put a damper on the speculative spirits of the crypto market.  Nevertheless, material catalysts in the near term (e.g. ETH ETF) should help support the market and tilt risk towards the upside in the medium term. As a result, expect derivatives funding rates remain elevated but stable around the 12% level. As previously mentioned, it seems likely that markets will take a breather during the summer months pending the result of the 2024 election before making its next big move.

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