Rising rates on U.S. Treasuries are testing DeFi
The Defiant • November 08, 2022
DeFi is yielding less than some traditional low-risk assets. U.S Treasuries can be bought with rates yielding 4% or higher, the 2nd highest since January 2008. Such yields come after the fourth consecutive 0.75% interest rate hike on November the 2nd.
This is in contrast with low risk stablecoin rates in blue-chip protocols yielding between 0.5 and 2%. All else being equal, this poses a clear opportunity to move money off-chain and buy treasuries instead of allocating stablecoin capital towards DeFi projects. However, so far, this has not been the case.
“There’s for sure a base of capital that’s in DeFi that is very sticky,” Teddy Woodward, co-founder of Notional, a fixed-rate yield protocol with $91.7M in TVL said. He said rising rates in traditional finance have somewhat retracted capital in DeFi, but that force has had a limited effect so far.
In theory, as stablecoins leave DeFi for favoured off-chain investments, borrowing rates on lending protocols will go up to reflect that. In a way, off and on-chain are communicating vessels. So far, they haven’t converged, but that doesn’t mean they won’t if rates keep going up. “People don’t shift their allocation on a dime,” Woodward said. If the differences persist, more stablecoins will leave DeFi eventually.