DeFi Yield Curve Strategies: Fixed Rate & Term Trading
DeFi yield curves unlock sophisticated trading strategies previously reserved for TradFi. Lock in fixed rates, speculate on yield changes, and trade the term structure—all on-chain.
- PT tokens let you lock fixed yields; YT tokens let you speculate on variable yield direction.
- Compare implied yield to your expectation—trade YT when you expect higher, PT when expecting lower.
- Thrive tracks yield curves across Pendle markets and alerts on attractive fixed-rate opportunities.
DeFi Yield Curve Analyzer
Compare term structures and identify opportunities:
Term Structure
Steep curve suggests market expects rising rates. Consider locking in longer terms now.
Understanding DeFi Yield Curves
In traditional finance, yield curves are fundamental to trillions in trades. DeFi is building the same infrastructure, creating new opportunities for sophisticated traders.
What Is a Yield Curve?
A yield curve plots interest rates against time to maturity. In DeFi:
- Short end: What yield can you get for 30-day lock?
- Mid curve: 90-180 day yields
- Long end: 1+ year fixed yields
Curve Shapes
Normal (upward sloping): Long rates > short rates. Market expects rates to rise or demands compensation for longer lock-up.
Flat: Similar rates across terms. Market expects stable rates.
Inverted (downward sloping): Short rates > long rates. Unusual—market expects rates to fall significantly.
Why Yield Curves Matter
- Lock in predictable returns: Remove variable yield uncertainty
- Speculate on rate direction: Trade views on yield changes
- Arbitrage opportunities: Mispricings between terms
- Risk management: Hedge exposure to rate changes
Key Insight: DeFi yields are far more volatile than TradFi rates. What's 20% today might be 5% next month. Fixed-rate protocols let you lock in today's rates regardless of future changes.
Pendle Finance Deep Dive
Pendle is the leading yield tokenization protocol. Understanding it unlocks yield curve trading in DeFi.
Yield Tokenization
Pendle splits yield-bearing assets (stETH, GLP, etc.) into two parts:
PT (Principal Token):
• Redeemable for underlying at maturity
• Trades at discount (discount = your yield)
• Buy at $0.90, redeem for $1 = 11% return
• Fixed return regardless of variable yield
YT (Yield Token):
• Receives all variable yield until maturity
• Highly leveraged exposure to yield
• If yield is higher than implied, YT profits
• Worth $0 at maturity (all yield distributed)
Fixed Rate Strategy
- Identify asset with attractive yield (e.g., stETH at 4%)
- Check Pendle markets for PT pricing
- Calculate fixed APY from PT discount
- If fixed rate > your expectations, buy PT
- Hold to maturity, redeem for full underlying
Yield Speculation Strategy
- Check implied yield in Pendle market
- Form view: will actual yield be higher or lower?
- If higher: buy YT (leveraged yield exposure)
- If lower: sell YT or buy PT
- Monitor and exit when thesis plays out
| Strategy | When to Use | Risk Level | Return Profile | Best For |
|---|---|---|---|---|
| Buy PT | Want fixed rate | Low | Guaranteed if held | Yield certainty |
| Buy YT | Expect yield increase | High | Leveraged upside | Yield bulls |
| LP in Pendle | Neutral on rates | Medium | Fees + rewards | Passive yield |
| PT/YT Arb | Mispricing exists | Low-Medium | Arbitrage profit | Active traders |
Yield Curve Trading Strategies
Strategy 1: Locking Fixed Yield
Goal: Eliminate variable yield risk, lock in predictable returns.
Execution:
- Compare fixed rates across terms (30d, 90d, 180d, 1y)
- Select term matching your investment horizon
- Buy PT at current market price
- Hold to maturity (important for guaranteed return)
Example: PT-stETH trading at 0.92 with 6-month maturity = ~17.4% annualized fixed yield.
Strategy 2: Yield Speculation
Goal: Profit from yield being higher/lower than market expects.
Bullish on yield (expect higher):
- Buy YT tokens
- Leverage exposure to yield increases
- Profit if actual yield > implied yield
Bearish on yield (expect lower):
- Sell YT or buy PT
- Lock in current rates before they drop
- Profit from rate decline
Strategy 3: Curve Steepener/Flattener
Steepener (expect long rates to rise vs. short):
- Buy long-dated PT (lock low rate)
- Sell short-dated PT (expect short rates to stay low)
- Profit when curve steepens
Flattener (expect rates to converge):
- Buy short-dated PT
- Sell long-dated PT
- Profit when curve flattens
Strategy 4: PT/YT Arbitrage
Theory: PT + YT = Underlying asset (always, by construction).
If PT + YT < Underlying:
- Buy PT + YT
- Combine to get underlying (instant profit)
If PT + YT > Underlying:
- Sell PT + YT
- Buy underlying to cover
Arbitrage opportunities are rare and quickly closed by bots.
Other Fixed-Rate Protocols
Notional Finance
Fixed-rate borrowing and lending:
- Lend at fixed rates for specific terms
- Borrow at fixed rates (know your cost)
- More traditional bond-like structure vs. Pendle's tokenization
Sense Finance
Similar to Pendle but different markets:
- Principal/yield token split model
- Different underlying assets supported
- Worth comparing rates to Pendle
Element Finance (Deprecated)
Pioneer in yield tokenization, now sunsetted. Many ideas carried into Pendle and others.
Comparing Protocols
- Check rates across protocols for same underlying
- Consider liquidity—thin markets = worse execution
- Audit status and TVL matter for risk assessment
- Gas costs can eat into returns on small positions
Risk Management
Liquidity Risk
PT and YT markets can be illiquid:
- Check liquidity before entering large positions
- Exiting early may incur significant slippage
- Best for funds you can lock until maturity
Smart Contract Risk
- Pendle is audited and battle-tested
- Underlying assets (stETH, etc.) have their own risks
- Composability adds layers of risk
Opportunity Cost
- Locked capital can't be used elsewhere
- If yields spike after you lock, you miss out
- Balance fixed allocation with flexible capital
Duration Mismatch
Buying long-dated PT when you might need funds early is risky:
- Selling PT before maturity exposes you to market prices
- You may sell at loss if rates have risen
- Match PT maturity to when you actually need funds
Frequently Asked Questions
What is a DeFi yield curve?
A yield curve shows interest rates across different time periods. In DeFi, it represents what fixed rates you can lock for 30 days vs. 90 days vs. 1 year. Normally, longer terms = higher rates (compensating for lock-up risk). An inverted curve (short rates > long) signals market expects falling rates.
What is Pendle Finance?
Pendle lets you tokenize and trade future yield. You can split yield-bearing assets into Principal Tokens (PT) and Yield Tokens (YT). PT = the base asset at maturity. YT = all yield until maturity. You can trade these separately, enabling yield speculation and fixed-rate locking.
What are PT and YT tokens?
PT (Principal Token) = redeemable for the underlying asset at maturity. Trades at discount to face value; discount = your fixed yield. YT (Yield Token) = receives all variable yield until expiry. More volatile; good if you think yield will be higher than market implies.
How do I lock a fixed rate in DeFi?
Buy PT tokens at a discount. Example: Buy PT-stETH at $0.95 that matures to $1 in 6 months = ~10.5% annualized fixed yield. You receive the fixed discount regardless of how stETH yield changes. At maturity, redeem PT for full underlying value.
What is implied yield in Pendle?
Implied yield = what the market expects the average variable yield to be until maturity. If implied yield is 15% but you think actual yield will be 20%, YT is undervalued. If you think actual will be 10%, PT is undervalued. Trade against implied expectations.
What is yield curve steepening/flattening?
Steepening = long-term rates rising faster than short-term (expect rising rates). Flattening = long and short rates converging (expect stable or falling rates). Trade steepeners by going long long-dated, short short-dated. Trade flatteners opposite.
What are the risks of yield curve trading?
Liquidity risk (PT/YT can be illiquid), smart contract risk, underlying asset risk (what PT is backed by matters), opportunity cost (locked capital), and early exit costs (selling PT before maturity may incur loss). Not suitable for funds needed soon.
How do Pendle LPs work?
Pendle LP pools hold PT + underlying asset (not YT). LPs earn trading fees + any incentive rewards. Impermanent loss is low near maturity but can be significant early. PT-asset LPs are lower risk than volatile asset pairs but still require active management.