Fixed-Yield Strategy

Volatility-proof yield - what you see is what you get!

How to Ape

  1. Buy PT

    1. Select the PT you want to buy.

    2. Select input asset (i.e. what you want to use to buy PT)

    3. Review the Output and Price Impact of your trade.

    4. Approve and confirm the transaction

  2. Passive Management - Hold PT and redeem the Underlying Asset upon expiry Active Trading - Sell PT when price increases

How Does it Work?

Principal Tokens (PT) let holders redeem the principal of the underlying yield-bearing asset after maturity, and can be sold anytime.

For example, holding 1 PT-stETH means you will be able to redeem 1 ETH worth of stETH after 26 Dec 2024, the maturity date.

Since the yield component (i.e. YT) is separated from the underlying asset like stETH, this allows the principal to be sold at a discount in the form of PT.

Over time, PT will appreciate in value and eventually match the underlying assets upon maturity. E.g. 1 PT-stETH that costs 0.9 ETH today will be redeemable for 1 ETH worth of stETH upon maturity.

This value movement of 0.9 ETH → 1.0 ETH constitutes the Fixed Yield aspect of PT. This redemption behavior on maturity is guaranteed by code. PT price can fluctuate prior to maturity, but will overall tend towards its underlying.

In short, PT holders profit when:

  1. PT is sold at a higher price, or;

  2. More ETH (i.e. Fixed Yield) is redeemed upon maturity

Underlying APY

Underlying APY is the actual, current yield of the Underlying. E.g. The underlying APY of PT-stETH pool is the stETH yield itself.

PT yield is fixed and unchanging. You outperform the yield market when the Fixed Yield you obtained PT at turns out to be higher than the Average Future Underlying APY.

Fixed APY

Fixed APY is the guaranteed yield you can get from buying PT.

The value is equal to the Implied Yield. You can also treat Implied APY as an indicator of where the market thinks yield will go - up or down.

When Implied APY is low = PT is expensive = Market is implying yield will go down

When Implied APY is high = PT is cheap = Market is implying yield will go up


What to Look Out for

Passive Management - Buy PT when Fixed APY is high

PT is cheap when Fixed APY is high relative to the Underlying APY.

Buying PT is also akin to shorting yield, and you profit more when the Fixed APY ends up giving you more yield than what you would have gotten from holding the underlying asset (i.e. Fixed APY > Underlying APY).

Knowing this, you can also sell your yield (i.e. YT) into PT when Fixed APY is high to lock in the high rates.

Active Trading - Trade PT in place of spot

Since PT represents the principal of the underlying asset, its price should move in parallel with the underlying spot price. There are cases however when PT will outperform spot trading, allowing traders to earn outsized returns. Since PT has a Fixed-Yield component, the downside risk is also cushioned compared to spot trading. Like spot, you can sell PT anytime to realize immediate returns when its price increases.

Predict the Direction of Implied APY

Just because PT is relatively expensive doesn’t necessarily mean that it’s overvalued.

If for some reason you think that yield will go down more in the future, it might be a good idea to purchase PT now ahead of time.

Remember, Fixed APY = Implied APY, which means you can also supplement your analysis/prediction by studying the historical trend of Implied APY on Pendle.

Price Impact

Price impact is the difference between the market price and the execution price. This is denominated in implied yield terms in Pendle as you're trading yield.

A large price impact can result in you receiving less than expected, so make sure to keep an eye on this when buying YT.

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