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May 10, 2024

Weekly Market Recap: May 10, 2024

Stablecoin rates were down across the board this week with rates -150bps vs the majors. Rates against weETH collateral also fell significantly down to just 9.50%, but capacity constrained. Over 500k USDC in demand went unfilled at the 9.50% clearing rate. ETH borrow rates, on the other hand, hold steady against weETH and wstETH. Overall,  demand is starting pick up with rates reaching levels that are beginning to draw in interest to lock in these rates for term.  

In an exciting development, this week also marked the first public auction on Avalanche supplying USDC stablecoins against sAVAX collateral. Keep an eye out for more exciting opportunities on Avalanche in the near term!

Variable Rate Markets

Basis and Perpetuals Markets

Futures and perps basis implied funding rates continue to decline, albeit at a slower pace, with 3-mo basis declining -1.84% and -1.36% on on a 30-day trailing basis, respectively. Perp funding rates and 3-mo basis close the week at 7.05% and 8.62%, respectively, on a 30-day trailing basis  

With the decline in derivatives funding rates, the DeFi borrow passthrough rate remains at extreme levels. As of the time of writing, Aave V3 borrow rates now exceeds perpetual swap funding rates prevailing on the major perp swap exchanges. This may be an indicator that the market is oversold, though as seen in prior episodes, this dynamic can last longer than most anticipate.

USDC Markets

In the variable rate DeFi markets, USDC borrow rates resumed to the downside, falling by -71bp from  10.41% to 9.71% on a 30-day trailing basis.  This sudden drop is attributed to the execution of a proposal to reduce the base rate from 12%—>7% on Aave V3 that passed on May 6.

Depsite the lowering of the base rate, intraday volatility remains subdued. Utilization remains well below the kink at just 78%.

The benefit of the reduction in the base rate is that it increases utilization and reduces the spread between borrowers and lenders. Indeed, this spread has narrowed in the past week in response to the curve update on Aave v3.

ETH Markets

Turning to ETH lending markets, rates on Aave V3 continue to bleed to the downside, closing down -3bps on the week at 2.29% down from 2.32% the week prior on a 30-day trailing basis. This decline is largely consistent with the decline in CESR staking rates, which closed -2bps on the week.

Lastly, turning to market internals, ETH borrow utilization continues to decline at an accelerating pace.

Overall, the sustained decline in interest rates and borrow demand is beginning to filter through in earnest on the various variable rate protocols, to the point that governance mechanisms are being invoked to adjust the market. This constant juggling of the tradeoff between volatility (high utilization) and narrow spreads (low utilization) highlights the simplicity and beauty of Term’s single price mechanism.

Looking forward

The uncertainty regarding the forward path of interest rates is expected to continue in the near term. This dynamic is healthy for Term and serves as another reminder of the benefit of fixed-rate fixed-term lending on chain.

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