Rates held steady at Term this week. Over 2.2mm USDC and 42 ETH cleared this week across four auctions. For ETH borrows, the results of the 3 months auction suggest that the curve remains relatively flat. This pattern is consistent with bull market dynamics where ETH borrow demand (for hedging purposes) declines.
In the variable rate markets, USDC rates continue to rise at a rapid pace with borrow rates rising +54bps from 8.36% to 8.90% on a 30-day trailing basis.
Volatility in variable rate USDC markets continue to remain elevated across the board. It remains to be seen whether raising the base rate from 5% to 6% will stabilize the markets (see governance vote from two weeks ago). Given that 30-day trailing rate is nearing 9% and futures/perps basis well into the double digits it seems unlikely that this will be sufficient to satisfy market demand.
ETH borrow rates on Aave V3 fell -3bps on the week to 2.82% on a 30-day trailing basis, while the CESR Staking Index, on the other hand, saw much larger dip -16bps on the week due to dampened activity around the holidays and increased staking volume (in part due to the recent restaking narrative).
Of note this week as a sharp increase in ETH supply that took utilization south of 70%, well below the 80% UOPT level.
Contrary to DeFi stablecoin rates (that tend to trade pro-cyclically with the crypto markets) ETH borrow rates historically trade in a counter-cyclical fashion. This pattern suggests that risk lies to the downside for ETH rates in the medium term. Specifically, a crypto bull run is likely to (i) increase available ETH supply for lending; (ii) decrease ETH borrow demand; and (iii) reduce ETH staking yields (best alternative yield).
Desire to maintain or increase ETH long exposure (increase supply):
The underlying driver behind increased demand for leveraged longs in ETH via perps/futures in bull market periods is the same driver that brings new naked ETH stakers and lenders to market. Some portion of newly established ETH long positions will be looking for ways to augment their returns through ETH lending/staking, thereby increase available ETH supply.
Reduced hedging motivated borrow demand (decrease demand):
Bull markets also see reduced ETH hedging demand. The desire to hedge ETH exposure through ETH borrows declines significantly in large bull runs. These dynamics reduce ETH borrow demand in ETH lending markets.
Diluted Native Staking Yields (decrease staking yield):
Lastly, while bull markets see increased network activity driving up network fees, it also brings in new holders looking to earn staking yield to augment returns. Depending on the relative growth of network activity vs. the amount of ETH staked it is very possible that ETH staking yields will go down in a bull market. The restaking incentives driving new ETH into existing ETH staking services could further accelerate this dynamic.