March 16, 2023|Commentary

A summary of the most volatile week in rates markets since 2008


Good afternoon from Cumberland APAC! This has been the most volatile weeks in rates markets since 2008, even eclipsing the beginning of Covid. The week started with a risk-off move, despite the Fed’s backstop of SVB. As the week progressed, the Fed continued to voice support of banks’ customers. This has come at the same time as the Fed attempts to maintain a hawkish stance to fight inflation. On Tuesday, traders began to call the bluff; it doesn’t make sense to continue to raise rates, which will lead to bank collapses, which the Fed will then have to bail out. Instead, it is more expedient to simply pump the brakes on tightening. A week ago, the market was expecting rates to rise for most of the year, including an all-but-guaranteed 50 bps hike for next week, hitting a terminal rate of 5.7% before starting to ease early in the year. Now the curve has been dramatically repriced: the next decision is expected to be only a 25 bps hike, and the market is expecting the Fed to turn around fairly quickly, with 3-4 eases expected before the end of this year. The market was *not* expecting this move, with many macro funds lined up with the easy trade, expecting rates to rise, and funds have been scrambling to buy gamma to defend themselves. June SOFR rallied 170bps on Tuesday, a larger move than we saw during Covid, and reminiscent of the rates volatility seen in ’08. In the past 24 hours, the contagion fears have gone global, with Credit Suisse under fire before being similarly backstopped, and it seems likely that most central banks will follow suit and protect their banks and investors.

graph table

What does this all mean for crypto? BTC and ETH have led the way, pushing to their high prices since the 3AC collapse. While the cake isn’t baked yet, this market has all the ingredients for a righteous move. We’ve had a year of the crypto market being punished by rate hikes, and now it seems like the hikes will cease sooner than expected and quickly reverse. And at the same time, we are seeing uncertainty in banks which will lead to a flight-to-quality that could very well end up with BTC. We can see this in the Gold market, where gold calls have spiked from 11% IV to over 20% (honestly, those IVs seem adorable compared to crypto), and more meaningfully, the skew has shifted a put skew to favoring calls. When consumers don’t trust their banks, there can be a flight to gold and BTC. And at the same time, there seems to be only one factor which could spoil this: global banking contagion, which would melt equities and drag crypto down (see: March 2020). However, given the staunch defense that central banks seem prepared to play, the likelihood of a meltdown feels unlikely here.

Over the weekend, we saw ETH outperform BTC. That was purely structural, and based on the fear of a USDC de-peg. Funds were flowing out of stablecoins and into risk crypto, and it’s simply easier to get from USDC to ETH. This week, BTC (+10%) has outperformed ETH (+6%), a fairly predictable move and one which likely continues in the above scenario. Bitcoin dominance is at 46%, the highest we’ve seen since June. It’s stayed under 50% ever since the Solunavax rally at the beginning of 2020, but narrative shifts into BTC tend to come and go in cycles. The May 30k/35k call spread is currently trading around $450; if BTC actually does go on a 2021-esque run here, that would be a good way to capture upside.

Alts, meanwhile, are somewhat in the gutter. Despite the rally in BTC and ETH, most alts are down on the week, with the DeFi sector in particular getting pummeled, down around 10% on average. While alts will represent value if BTC continues to rally, and will eventually benefit from Beta, at the moment it is really BTC’s show (and to a lesser extent, ETH, which has the added benefit of being deflationary; 45k ETH have been burned in March alone). If we see BTC find its level and pause, we would expect alts to catch up. However, in the scenario where BTC continues to rally, alts will likely underperform until the BTC rally stalls, and if BTC sells off, we would also expect alts to slide, so an alts catchup play feels a bit more wait-and-see.

One last note: crypto markets have suffered from impaired banking rails this week as well as uncertainty around stablecoin pegs, and even some doubt about the role of stablecoins in general. Cumberland is extremely proud to be the backstop of liquidity during the most chaotic and stressful markets. Our OTC desk was open for business throughout the weekend, and we have been able to provide liquidity in coins like USDC continuously, and have added USDP to our OTC tradeable list as well. We have been able to process wires for settlements, and will be adding further banking support for redundancy this week. Acting as the institutional liquidity provider for crypto markets is a continuous privilege of which we are exceptionally grateful, and we thank our counterparty base for its continued support.

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