In a reversal from the prior week, borrow demand against LRTs declined on account of what has been perceived to be a disappointing EigenLayer airdrop announcement. ETH borrow rates against weETH held steady but rates to borrow USDC dropped by -300bps to clear around a still healthy 14.40%. Turning to the majors, fixed rates for stablecoins on Term against wBTC held steady at 9.0% fixed for a four-week term, consistent with continued stabilization in DeFi funding rates. Overall, borrow demand declined slightly on the week on anecdotes of deleveraging due to the recent market correction.
Futures and perps basis implied funding rates continue to collapse to the downside with 3-mo basis declining -3.36% and -4.67% on on a 30-day trailing basis, respectively. Perp funding rates and 3-mo basis close the week at 8.41% and 10.45%, respectively, on a 30-day trailing basis
With the decline in derivatives funding rates, the DeFi borrow passthrough rate is is reaching 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.
In the variable rate DeFi markets, USDC borrow rates are beginning to stabilize, rising by +1bp from 10.40% to 10.41% on a 30-day trailing basis.
Intraday volatility remains subdued consistent with utilization at 73% - well below the interest rate kink where rate begin to spike.
The tradeoff from the recent switch to a higher base rate / lower utilization is that borrow/lend spreads remain extremely wide. Lenders are currently earning, on average, over 300bps less than the borrow rate paid by borrowers.
Turning to ETH lending markets, rates on Aave V3 continue to bleed to the downside, closing down -7bps on the week at 2.32% down from 2.39% the week prior on a 30-day trailing basis. This decline is largely consistent with the decline in CESR staking rates, which closed -5bps on the week.
Lastly, turning to market internals, ETH borrow utilization continues to decline but at a slow pace.
The only other item of note in lending markets is that Aave continues to up their reserve factor (the fee charged to lenders) to encourage users to migrate off V2. Aave is now charging 45% of interest earned by lenders on V2.
With perp funding rates getting back down to levels prevailing during the bear market days of early 2023 it appears as if the market may be beginning to get to oversold levels. Unclear, however, when conditions will change. Everything so far this year is looking to play out according to the old Wall-Street adage “Sell in May, Go Away".” If the market follows the Wall-Street playbook, then historicals would suggest that the next runup won’t happen until early Q3 when the market returns to work again after summer break. Until then, happy trading!
