It was a busy week at Term Finance. This week, Term cleared over >3mm notional in volume and completed five auctions: three loans denominated in USDC (against sDAI, wstETH and wSTBT) and two denominated in ETH  (1mo and 3mo reopening against wstETH). Overall, rates held relatively steady on the week save for the 4wk ETH auction that saw a dip down to 2.2%.  Of particular note was the successful clearing of Term's inaugural USDC loans backed by wSTBT - a permissioned RWA. Short Term T-Bill Token issued by MatrixDock. This auction was a first-of-its-kind fixed-rate DeFi loan backed by a permissioned RWA and serves as a proof of concept to unlock what some forecast to grow to a $16T RWA market.    

Historical ETH and USDC clearing rates on Term

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Variable Rate Markets

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USDC Markets

In the variable rate markets, USDC rates remain elevated with with borrow rates rising slightly from  7.36% to 7.56% on a 30-day trailing basis.

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Volatility in variable rate USDC markets also continue to remain elevated across the board. Intraday highs exceeded 10% on 6 out of 7 days this past week and saw rates spike over 20% on Monday.

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For those looking for alpha, one particularly quirk that stands out in stablecoin markets is the persistently low DAI borrow rates available in DeFi. Spark currently offers DAI borrow rates at 5.5%, which is suppressing DAI borrow demand on Aave. This sharp contrast between the USDC supply and DAI borrow rate on Aave creates a looping opportunity that looks particularly ripe for the taking.

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ETH Markets

ETH borrow rates on Aave V3 saw its first uptick in weeks with the 30-day trailing borrow rate rising from 2.82% to 2.84%.

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Borrow demand continues to steadily march upwards though supply appears forthcoming. Consistent with this observation, utilization has continued to hover just below the optimal utilization rate of 80%, though this was not without some volatility.

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Zooming in on intraday highs, early signs of market imbalance are beginning to show. For example, on Tuesday December 12, ETH borrow rates spiked as high as 80% intraday causing users to unwind positions. On a shorter 7-day trailing basis ETH borrow rates are now averaging 3.09%.

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Macro

In the last weekly, this newsletter focused on the drivers behind rising DeFi interest rates with particular emphasis on funding rate pressure arising from rapidly increasing leveraged exposure through BTC/ETH perps and futures. This week the newsletter focuses on TradFi money markets and the strong currents pulling TradFi rates in the opposite direction.

The FOMC met this week and the messaging that came out of the meeting was a significant departure from that of recent history. Specifically, NONE of the updated FOMC forecasts published this week implied a rate hike and the MEDIAN forecast suggest three cuts (to 4.625%) by the end of 2024 .  

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Market participants, on the other hand, are pricing in far deeper rate cuts than the Fed would admit with the mean implied Fed Funds rate trading just under 4% (a full one-and-a-half percentage points below current Fed Funds targets).  

With DeFi rates on the rise and TradFi rates expected to decline in 2024, next year just might be the year that liquidity returns to DeFi. Indeed, consistent with this forecast Aave rates have de-inverted relative to U.S. T Bill rates in recent weeks and continues to hold steady above 7%. Should market forecasts play out as the Fed Funds market expects, expect liquidity to return to DeFi at a rapid pace. In the meantime, Term will be actively laying the groundwork to lead the charge into this wave, offering scalable and stable on-chain loans.  

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