Fixed rates on Term diverged from variable rate markets this week (which fell sharply) rising +100bps from 7.50% to 8.50% for four weeks fixed lending USDC against wBTC and wstETH. Higher rates were buoyed, in part, on bullish sentiment going into the ETH ETF launch in the first half of the week. A re-opening of the sUSDe 3mo loan on Wednesday cleared at 9.50%, unchanged from the week prior and a new market lending USDC against wormhole SOL cleared at a robust 12% fixed rate. Overall, demand for term funding remains robust despite declining rates in the variable rate market. ETH markets, on the other hand, remain relatively tepid.
In derivatives markets, implied funding rates for 3mo basis and perps were mixed on a 30-day trailing basis, with 3mo basis falling by -1bps and perp funding rising by +13bps on the week. These metrics, however, disguise a rather volatile perp funding rate market that saw rates bounce up and down between 6% - 11% over the past 7 days.
In stark contrast to perp funding rates, 3mo basis remains relatively stable at and around the 10% level, which suggest a divergence in sentiment between the short-term crypto day traders that frequent perps markets vs. the medium swing traders that tend to favor fixed date futures.
Sooner or later these should converge but it bears to note that with BTC closing the week back near the higher end of the recent range around $68k, which also seems inconsistent with the seemingly bearish signal from the perp funding market.
Focusing in on the DeFi variable rate market, USDC borrow rates continued to decline, falling by -22bp on the week to close at 7.90% on a 30-day trailing basis. This decline was exacerbated by a late week implementation of a proposal to reduce the stablecoin interest rate target from 9% —> 6.5%, leading to a sharp and sudden correction in variable rate lending markets for stablecoins.
The late week adjustment of the interest rate target helped to boost utilization on Aave taking the utilization rate from ~75% back up to around the ~85% level on account of increased borrowing.
Neverthess, utilization remains firmly below the 90% utilization kink with the result that intraday volatility remains muted (even if day on day and week on week levels continued to trend strongly to the downside).
While the decline in lending rates has come at the expense of liquidity suppliers on Aave, the one silver lining is that the spread between the supply and borrow rate is finally beginning to narrow once again.
Turning to ETH rates markets, ETH rates continue to converge towards the CESR staking rate rising by +5bps vs a CESR staking rate that is relatively unchanged on the week.
While not as extreme as it was last month, the market also some some brief but (relatively) muted spikes towards 4%+ rates over the past seven days suggesting that the market remains underpriced relative to market demand.
Where utilization peristently hovers at and around the 90% kink, it is a good sign that the target rate needs to be revised up.
While its hard to say for certain, this persistent demand to borrow ETH appears to be correlated with rising supply caps on weETH collateral on Aave.
Lastly, we revisit our monthly stablecoin flows report. Overall, stablecoin inflows picked up in pace over the past month, increasing by nearly +$3bn over the past four to five weeks. The majority of this were due to inflows into USDT and USDC, in about equal amounts. PYUSD and FLEXUSD were surprise gainers, while UDCB (Blast) and USDe saw notable outflows on account of waning excitement around liquidity mining campaigns that have seemingly gotten long in the tooh.
High level, crypto markets remain rangebound in a corrective zone that has held firm since the March peak, closing the week near the middle to upper half of the range. The much-anticipated ETH ETF launch on Monday seems to have been fully priced in, given the wild price action post-launch. This action likely contributed to some of the perpetual funding market gyrations observed in the second half of the week. It appears plausible that these funding rate movements were due to short-term traders positioned for an ETF pump being washed out of their trades.
Considering that 3-month basis rates are relatively stable around 10% and Bitcoin finished the week close to last cycle’s highs (68k), it seems wise to take signals from these two indicators rather than the unusually volatile perpetual funding market of the past few days. Notably, the last time Bitcoin traded around these levels in March, Aave rates were around +17% and perpetual funding rates were around +30%—signs of a heavily overextended and overleveraged market. The fact that Bitcoin holds steady in the high 60s with perpetual funding at cycle lows and Aave rates trading near Fed funds is extremely bullish. Just imagine what could happen if short-term traders get bullish again.
Until then, take this opportunity to lock in low yields before the market heats up again. Happy trading.
