Looping Strategy with Pendle PTs

The Term Structure team has introduced a new investment opportunity specifically designed for Pendle fixed-income tokens (Pendle PT) holders! Pendle, a leading yield trading protocol on Ethereum with a high Total Value Locked (TVL), has partnered with other DeFi protocols to enable Pendle PT to be used as collateral for borrowing across various lending platforms. However, many of these platforms offer variable interest rates that can spike during market fluctuations and periods of high pool utilization, potentially eroding initial returns and even leading to negative yields.

But now, there’s a perfect solution.

Term Structure, a protocol that offers fixed rates, fixed terms, and peer-to-peer lending and borrowing on Ethereum, has partnered with Pendle to introduce a new option. Investors can now use PT-sUSDe and PT-weETH as collateral on Term Structure to borrow tokens at fixed rates and fixed maturity dates. This allows borrowers to lock in the interest rate spread without worrying about market rate fluctuations or changes in pool utilization.

Here’s an example of how to execute a fixed interest rate spread trade using Pendle PT through Term Structure. We’ll use the T-account concept in accounting to illustrate an investor’s assets and liabilities. Before borrowing, the investor has no liabilities. On the asset side of the T-account, he holds $10,000 worth of Pendle PT and earns a 15% APY.

Noticing a 10% annual borrowing rate for USDC on Term Structure, the PT investor decides to use PT-sUSDe as collateral to borrow $7,500 USDC at a 10% fixed rate. The borrowed $7,500 USDC is then immediately used to purchase an equivalent amount of PT-sUSDe, allowing the investor to earn additional fixed interest.

Now, the investor has an additional $7,500 in assets that earn 15% fixed interest and $7,500 in liabilities that must be repaid at a 10% fixed interest rate. When combining the interest expenses and income, this interest rate spread trade results in a net profit of 5%, or $7,500 * 5%.

Indeed, the newly acquired $7,500 in PT-sUSDe can also be used as collateral on Term Structure to borrow more USDC at a lower rate than that of PT-sUSDe, which can then be used to purchase even more PT-sUSDe.

The following diagram shows the results of repeatedly borrowing and lending, or looping, PT-sUSDe over four rounds. For simplicity, we assume that the fixed borrowing rate of USDC is 10% for all four rounds. In the end, we have $30,506 worth of PT-sUSDe generating a 15% yield and $20,506 worth of USDC loan requiring 10% interest payments.

After four rounds of looping, our interest income increases from $1,500 to $4,650.15, while interest expenses amount to $2,050.60. This results in a net interest income of approximately $2,600.

Based on the calculation, the Pendle PT investor achieves leverage of 3.1x through looping on Term Structure. This boosts the yield from 15% to 26%!

This is just a basic example of how investors can execute interest rate spread trade. In practice, investors can decide how many rounds of looping to engage in based on their preferences and how much interest rate spread they wish to earn per trade.

Don’t want to miss out on this lucrative investment opportunity? Act now to secure fixed rates and terms on Term Structure to maximize your returns!