PT instruments
Last updated
Last updated
Trading PTs on leverage is not for everyone. DYOR and monitor your position frequently.
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 find more info on PTs directly on .
PTs were recently made available as collateral on lending markets such as Silo, Dolomite and Morpho. Users saw an opportunity to lever up on the fixed yield of PTs by recursively borrowing a correlated asset, 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 components:
Lending: on one hand you’re lending a PT token which normally earns you nothing in interest, but has an intrinsic fixed yield at maturity (e.g. PT-eETH).
Borrowing: on the other hand, you’re borrowing a quote currency at a variable rate (e.g. ETH).
The difference between the two is what Contango displays as ROE when opening a position.
At expiry, 1 PT will be redeemable exactly for its underlying. This 1:1 redemption is guaranteed by Pendle.
As long as the interest you pay for borrowing doesn't offset the gain from lending the PT, you will have a profit (but beware of exit liquidity and price impact too). In order 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) and what would be the PnL on the PT price movement alone. What is shown on the table is the sum of both.
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 the underlying. However, regardless of this temporary fluctuations in price, often driven by points speculators, at maturity 1 PT is always redeemable for its underlying.
The ROE shown on Contango when opening 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. So that ROE value is going to hold true if: you ride this position to maturity; the borrowing rate on ETH stays, on average, on the level it is until then; you can close your position without major price impact.
The ROE shown on the Open Positions list is the ROE relative to your position, since the PT is fixed rate and calculated with your entry price vs expected price (1:1) at maturity.
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.
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 and eating up your profits during the lifetime of your position, consider hedging by using YT instruments on Pendle (NFA).
When closing, you should consider market impact on the swap, which depends on wether or not the PT is being quoted against the same underlying asset. For instance, a PT for eBTC that is quoted against eBTC (so PT-eBTC/eBTC) does not incur in any market impact post-expiry as Contango just redeem and repay, and no swap is needed. Conversely, a PT for USDe quoted against DAI (so PT-USDe/DAI) needs swapping to repay debt after redeeming and will thus incur market impact.
Also bear in mind that, Contango displays a price value that it gets from , which could be off the real execution price you'd get if actually trading. To see the actual price you need to your position. On the Open Positions list, since we can't know what will be actual execution price, Contango shows the expected ROE based of oracle price (mark price on the UI), and when you are about to execute we show you the firm price (with a icon next to it). We display both values next to the other, so you have to ensure you're still happy with the actual execution price you are being quoted.
If you enter the trade with something that's not the PT or its quote currency, you might need to lower the leverage, to avoid Contango failing to open the position because of the .