Yen Carry Unwind and Soft Crypto Carry: Market Pressures and Ethena's Deleveraging Cycle

Source: Blockworks Original Title: Yen pressures meet soft crypto carry Original Link: https://blockworks.co/news/yen-pressures

Market Overview

BTC dropped about 5% in early Asia hours, trading near $86K. The move hit thin late-weekend liquidity and flushed several hundred million of long leverage.

On the rates side, Japan is reactivating the yen-carry unwind. Two-year Japanese Government Bonds (JGBs) trade near 1%, 10-year yields are around 1.9%, both the highest since 2008. Overnight Interest Swaps now price about 80% odds of a December hike from the Bank of Japan.

The last surprise move in mid-2024, when the Bank of Japan lifted rates to 0.25%, drove a sharp USD-JPY reversal and contributed to a near 30% BTC drawdown to roughly 49K as macro books de-grossed risk. A similar pattern appeared today, with BTC tracking the Nikkei lower during Asia hours.

The Yen Carry Mechanism

The underlying mechanism is unchanged. Global macro funds and institutions borrow yen or short JGBs to fund higher-yielding USD and EUR assets. As JGB yields rise, the yen funding leg becomes more volatile and more expensive. Investors reduce carry books and cut the highest beta exposures first, so BTC sits at the front of the liquidation stack.

The September 2024 BIS Quarterly Review quantified the size and opacity of this ecosystem:

• Notional FX swaps and forwards with JPY on one side reached $14.2 trillion dollars (about 1,994 trillion yen). These positions sit off-balance-sheet and do not appear in conventional debt metrics.
• Visible on-balance-sheet yen loans to foreign non-banks totaled only $271 billion dollars, confirming that most yen borrowing happens through derivatives rather than loans.
• About $1.7 trillion dollars of yen liquidity is provided by non-bank financial institutions like trustee accounts. These allocators are volatility-sensitive and are prone to withdraw liquidity quickly under stress.

As yen becomes more expensive, positions need to be unwound. This forces both de-risking in high beta assets and mechanical JPY buying, which can feed a reinforcing loop as yen strengthens.

China Policy Catalyst

Adding fuel to the fire, China contributed another catalyst. The central bank reiterated that all virtual-currency trading remains illegal and explicitly categorized stablecoins under AML and capital flight restrictions. Hong Kong crypto-linked equities reacted immediately: several major players saw significant declines of 5-10%.

The substance of the policy is not new, and it seems this is the hundredth time China is restricting crypto. However, the price reaction is significant, and shows we are still in a highly skittish regime.

USDe Deleveraging and Ethena Ecosystem

This year’s October 11 liquidation episode was the largest in crypto’s history. A tariff announcement sent BTC from about $120K to roughly $102K and wiped out about $19 billion dollars of open positions in 24 hours. USDe traded as low as $0.65 on certain platforms and about $0.92 on others. Despite this, Ethena processed $1.9 billion of redemptions, maintained full backing and contained systemic contagion. Combined with a previous $1.5 billion exploit, this was a second major stress event that USDe passed with flying colors. However, despite that resilience, USDe supply has fallen almost 50% from the $14 billion dollar peak to about $7 billion.

Soft Carry Environment

The driver behind this is unattractive carry. Following October’s open interest wipeout, funding rates for BTC and ETH are muted to negative, with dashboards showing negative funding across majors. Since November, the sUSDe spread has been below three-month Treasury yields.

With core delta-neutral strategy being unprofitable or returning low yields, 63.3% of the system is now held in liquid stables rather than deployed in delta neutral carry.

Pendle and Aave Impacts

The unwind also shows up in Aave and Pendle TVL:

• sUSDe looping became unattractive as sUSDe yields fell below USDC borrow rates (4.87% USDC borrow vs 4.77% sUSDe APY).
• The November Pendle sUSDe PT expiry removed most of the size from Aave, and exposure fell from more than $5.4 billion to about $340 million.

Going forward, the market needs to assess whether new expiries will attract significant utilization. The February 2026 PT implies a yield of only 5.8%, the lowest of any previous expiry, and at current levels, looping against Aave borrow rates is not profitable, so Aave PT utilization should remain low. Secondly, sUSDe rates must climb back above USDC borrow rates to continue to see demand on Aave.

Outlook

Therefore, until funding turns frothy, Ethena’s core engine remains impaired. And as crypto becomes more institutionalized, with larger market makers and deeper derivatives liquidity, the base case is that funding rates trend structurally lower. For yields to recover, directional appetite must return so perp basis widens, and ETH volatility needs to rise so positive funding can re-establish itself.