Volumes on the standard recurring Term auctions remain muted. USDC volumes were on the low side and rates declined to the 5-6% range, on average. The one bright spot was the onboarding of deUSD collateral that cleared over $1mm at a healthy rate of 13% APY over a four-week term.
Derivatives markets are showing signs of stabilization for the first time over a month. The 3-month basis rate rose by +15 bps while perpetual funding rates rose by +28 bps over a 30-day trailing period. This pattern is even clearer when looking at spot rates, which show both 3-month basis and perpetual funding rates rising into the 7%+ range.
The spread between DeFi rates and derivatives rates also continued to normalize, though remains elevated as is common after these sudden market shifts.
Overall, derivatives market show signs of normalization but is far from being out of the woods. Keep an eye on 3-mo basis rates to identify the trend and spikes in perpetual rates for early signs of a shift back to a bullish tone.
Turning to DeFi variable rate markets, it appears rate cuts came early in DeFi. Aave governance executed a proposal to cut the target rate by 0.50% from 5.5% to 5.0%, see here. While USDC borrow rates fell just -9bp on the week to close at 5.53% on a 30-day trailing basis, the week-over-week spot rates dropped by -56bps to close at 4.80%, consistent with the -50bp cut in the target rate.
This rate cut helped to stem further declines in borrow utilization, but did not do much to stimulate new borrows in the aggregate.
The one benefit of the cut was a decline in the supply rate / borrow rate spread, which declined -35bps on the week to close at a +134bp spread, vs +169bps the week prior.
Until markets take a turn up, expect stablecoin rates and stablecoin rate volatility to remain subdued in DeFi.
Turning to ETH rates markets, ETH rates held steady, with rates falling by -1bps to 2.55% on a 30-day trailing basis over the past week. This decline was consistent with CESR’s staking index, which fell by -1bp over the same period to 3.09% on a 30-day trailing basis.
Intraday volatility show no signs of stress or instability,
And supply/demand dynamics remain relatively steady.
Next week brings the much anticipated September FOMC meeting. The market is expecting roughly equal odds of a 25bp and 50bp rate cut. Needless to say, a 50bp rate cut should be constructive to crypto markets. On the DeFi lending side, however, the dynamics are bit less straightforward with bullish crypto price action potentially offset by increased stablecoin supply on chain. With the election just two months away, it seems uncertainty around the results (and the regulatory environment) might hold back the bulls from going all-in before the election is called.
