PT instruments
PT instruments
PT instruments are a mix between perps and dated futures. Given their nature they’re meant for long-term trades, where you hold your position until the maturity of the PT. Here’s a detailed explanation of how these instruments work and what to expect when trading them.
As a reminder, Principal Token (PTs) represents the principal portion of an underlying yield-bearing asset. Upon maturity, PTs can be redeemed at 1:1 for the underlying asset (e.g. 1 PT-eETH is redeemable for 1 ETH worth of eETH).
Since they’re devoid of any yield component, PTs can be acquired at a discount (aka, at a fixed yield) compared to the underlying asset. The value of a PT will approach and ultimately match 1:1 the value of the underlying asset at maturity. You can obviously find more info on PTs directly on Pendle docs.
Rationale for trading PTs on leverage
PTs were recently made available as collateral to borrow ETH on Silo. Users saw an opportunity to lever up on the fixed yield of PTs by recursively borrowing ETH, converting it to more PT and lending it to amplify their exposure.
Instead of doing it manually, Contango automates this process in just 1 transaction, but the idea remains the same: by using some margin you get a leveraged exposure to a PT fixed yield.
Please bear in mind that the position you open on Contango has two legs:
on one hand you’re lending a PT which earns you nothing in interest but has a fixed yield at maturity
on the other hand you’re borrowing ETH at a variable rate (except for the PT-rsETH instrument which has a fixed borrow rate of 30%, making it behave like a dated future).
The difference between the two legs what is advertised on Contango as ROE when opening a position.
At expiry, 1 PT will be redeemable exactly for 1 ETH. This 1:1 redemption is guaranteed by Pendle. As long as the interest you pay for borrowing ETH doesn't offset the gain from lending the PT, you will have a profit. But to realize that gain, you may need to hold your position until expiry.
PTs indeed behave like zero-coupon bonds, which means that, even if you hold a PT in your wallet, you're guaranteed to make the advertised fixed yield only if you hold to maturity. If you exit early, you can earn or lose money depending on the ongoing market price.
If you hover on the PnL column of your position, you’ll see a breakdown of what you owe in interest (for borrowing ETH) and what would be the PnL on the PT price movement alone. What is shown on the table is the sum of both.
Things to know before entering a PT trade
When there is high demand for YTs on Pendle, then the price of the corresponding PTs can fall. This can cause the PnL of your Contango position to fluctuate and turn negative. Similarly, the value of your position might be changing because the price of the PT does not move linearly towards the 1:1 parity with ETH. However, regardless of this temporary fluctuations in price, often driven by points speculators, at maturity 1 PT-eETH is always redeemable for 1 eETH.
The ROE shown on Contango is based on two things: 1) the difference in price of the PT you bought vs the price at expiry and 2) the borrowing rate on ETH. So that ROE value is going to hold true if you ride this position to maturity and the borrowing rate on ETH stays, on average, on the level it is until then.
You can still close your position early, but you would be susceptible to the ongoing market price of the PT, which, as mentioned, is not guaranteed to be linear and will be driven by market conditions and also by the average borrowing rate you paid so far.
Also bear in mind that, Contango displays a price value that it gets from oracles, which could be off the real execution price you'd get if actually trading. To see the actual price you need to simulate closing your position.
Sometimes Pendle has limited liquidity; since it’s the only trading venue for PTs, you may not be able to exit (before maturity).
After expiry, we advise you to close your position. The PT of your position has no more yield but you will still pay for borrowing ETH, so this will start eating up your profit. However, a few hours of keeping the position open shouldn't make a big difference.
If you’re still worried about ETH interest rates skyrocketing (except on PT-rsETH, where ETH borrowing rate is fixeda t 30%) and eating up your profits during the lifetime of your position, consider hedging by using YT instruments on Pendle (NFA).
If you enter the trade with something that's not the PT or ETH, you might need to lower the leverage a lot, to avoid Contango failing to open the position because of the 2 slippages.
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