What a week. Crypto is deep in the red and yield farmers are feeling the pain. For the first time in months, DAI recursive lending rates on Compound and Aave are actually lower than the standard supply rates. The DAI recursive lending rate on Compound is at 2.25% while Aave is only 1.85%. This means that Aave's recursive lending rates on DAI and USDC are now lower than 10y US Treasury yields.
Either yield farmers think that the recursive lending strategy has zero risk, or there will be substantial position unwinds coming on the horizon. If the AAVE and COMP prices don't rebound, we'll soon see how much of their activity is organic, and how much is just farming the incentives.
We may already be seeing the start of these unwinds. Over the past week, we've seen a significant migration of funds into Notional's fixed rates. DeFi users have lent ~27M across DAI and USDC which has compressed the spread between fixed rates on Notional and Compound and Aave's supply rates. The move makes sense, and we expect it to continue.
It's hard to see how baseline supply rates are going to increase from here. The current price action has destroyed the demand for leverage. And particularly with the recursive lending rates so low, organic fixed-rate yield at 8% - 9% on Notional seems like a no-brainer. I think that Notional's rates are going to move at least 200-300 bps lower in the next few months - the relative value at current lending rates is just too attractive.
Elsewhere in the rates space, activity on Element and Yield continues to be pretty quiet. Rates on those two platforms are mostly flat on the week and remain low.
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