Happy Holidays from the Term Finance team! In preparation for the holiday season, loans were extended into the new year, giving our users a well deserved break. Auctions will resume the week of January 6. For those looking to lock in fixed-rates during the holiday break, visit the Blue Sheets - simple earn page (app.term.finance/earn) to explore current opportunities - *Not available to U.S. persons.
To stay up to date on the current state of DeFi lending markets, read on below.
In derivatives markets, funding rates continue to accelerate to the downside, with 3-month basis falling -120bps to 14.22% and perpetual funding rates declining by -429bps to 16.53% on a 30-day trailing basis.
Consistent with this decline, DeFi rates are beginning to pick up on a relative basis, coming off cycle lows at a rapid pace and closing the week at 84% passthrough relative to derivatives rates.
Keep an eye on the relative strength of perps vs 3-mo basis rates in the medium term. If perp rates stay depressed for too long, 3-mo basis will follow suit.
Turning to DeFi variable rate markets, floating rates continued to rise, closing up +35bps on the week at 13.90% on a 30-day trailing basis. Over a shorter lookback period (just seven days), however, Aave rates averaged 12.44% on the week, foreshadowing lower rates ahead.
Diving in the microstructure of Aave USDC markets, it appears that recent hikes to the base rate have helped achieve equilibrium between supply and demand (after allowing over two months of extreme volatility).
Intraday spikes to 60%+ have receded with utilization hovering around the kink with far less variation.
With rates stabilizing around at much higher levels, however, the impact of Aaves 10% rake and 90% utilization remains pronounced — leading to a sustained 230bp spread between supply and borrow rates.
All eyes will be on how the market trades in the first few weeks of the New Year. Until then expect stablecoin rates to remain steady.
Turning now to ETH markets, ETH rates continue to rise, with borrow rates climbing another +11bps to 2.96% on a 30-day trailing basis. Borrow rates continue to diverge from the CESR staking index, which closes the week unchanged at 3.18% on a 30-day trailing basis — further squeezing the arbitrage between staking rates and ETH borrow rates in DeFi.
Recent onchain activity, however, suggests this trend should reverse. Santa came early for DeFi borrowers this year with a ~130k ETH on Christmas Eve, which should lower rates barring a substantial uptick in borrow demand into the new year.
Intraday charts confirm that since the Christmas Eve deposit, the market has been free of any intraday spikes.
Looking ahead, ETH rates should stabilize and settle at lower levels following this substantial Christmas Eve deposit, barring any unexpected shifts in market dynamics.
So far, year-end has played out largely as expected. The market has been choppy, but otherwise directionless during the holiday season. The new year should break this pattern, and if history is any guide expect the post-election rally to pick up steam again for a substantial rally in Q1.
