AI Rout Spurs Flight to Quality, Rates Drop as Traders Seek Safe-Haven

Flash Update: US RATE MARKETS – THURSDAY OCTOBER 15, 2026

• US Treasury yields and SOFR swap rates are lower this morning as disappointing AI sector earnings spooked investors, leading to a flight-to-quality

• Global equities fell as a selloff in the artificial-intelligence trade gained momentum and pushed investors toward the safety of bonds

• Rates are down the most on the long-end of the curve, where yields are particularly attractive given the ramp-up in bond yields in recent months

• September PPI came in hotter-than-expected, rising at the fastest pace in four years

• The strong PPI data keeps the “higher inflation” narrative front-and-center for rates traders

• Traders, however, are mostly ignoring the strong PPI data this morning – the “AI story” is grabbing the spotlight for the moment

• The latest Retail Sales data showed a strong US consumer continues to power through inflationary pressures and bolster the economy

• The US-Iran conflict and the price of crude oil, and resultant fear of higher inflation continue to be a primary focus for the rate markets

• “Big” Bank and tech sector corporate earnings due this week will remain a key focus for markets

• Note: FOMC Chair Kevin Warsh speaks tonight, 10/15 at a Fireside chat with the IMF’s Georgieva – we will not see the market’s reaction until tomorrow morning

• The next FOMC rate decision is due Wednesday, October 28th at 2:00 PM

• Short-term SOFR swap rates are trading down ~5-10 bps this morning, depending on tenor

• Medium-term SOFR swap rates are down ~12-14 bps currently, depending on tenor

• Long-end SOFR swap rates are trading down ~12-13 bps this morning, depending on tenor

Good morning – What a difference a day makes!US Treasury yields and SOFR swap rates are lower this morning, as disappointing AI-sector earnings spooked investors, sending them scrambling for the safety of US Treasuries. The dip in Treasury yields pushed SOFR swap rates significantly lower this morning.

Traders mostly ignored the red-hot PPI and strong Retail Sales data we saw this morning – further deterioration in the equity markets is the far bigger worry for traders today. Rates did pop up a touch after PPI printed, but the AI fear is simply too worrisome for markets to ignore. The main fear is that the AI-sector may be in for significantly more challenges than investors anticipated, which could have far reaching consequences for the equity and bond markets.

I don’t think the economic data we saw this week did anything to alter the market’s view that the Fed will need to raise rates again, perhaps more than once. However, this AI development is an unexpected wildcard, so I expect volatility to remain elevated as traders sort through the current challenges they face. Uncertainty is once again ramping up in the market.

I expect we may see a downside follow-through in the equity markets today – if that happens it is likely the “flight-to-quality” continues and rates move even lower today.However, if equity markets recover, we could see the safe-haven trade start to unwind as the focus shifts back to inflation. In that case rates may move higher today.

CHARTS OF THE DAY:

A: Fed Rate Hike Expectations Adjust…Again

Source: Bloomberg, LLP | FED RATE HIKE EXPECTATIONS THROUGH MARCH 2027

B: AI Jitters Force Traders to Seek Safe-Haven

Source: Bloomberg, LLP | UST 10-YEAR YIELDS – PRIOR 12-MONTHS

SOFR Swap Market - Quick Summary:

• The 1Y SOFR swap rate is trading down ~5-7 bps this morning. 2Y and 3Y SOFR swap rates are currently trading down ~8-10 bps. 5Y and 10Y SOFR swap rates are trading down ~12-14 bps this morning. The very back-end of the swap curve (20Y and 30Y) is currently trading down ~12-13 bps from yesterday’s closing levels.

“Key News” the market is tracking includes:

• Geopolitical developments continue to weigh on markets.Developments in the US/Iran “war” will continue to captivate the market’s attention. l

• Lack of forward guidance from the Fed is forcing traders to pay more attention to economic data – this may fundamentally change the way markets position for and react to Fed rate decisions going forward.

• There is still a sharp focus on the performance of the growing AI sector and more broadly, on what AI really “means” for the US and global economies. Overall market sentiment, and perhaps even economic performance, may be impacted by AI for the foreseeable future.

• Tariffs remain in focus, particularly the “trade war” situation between the US and Canada. US/China relations are always in focus.

CHART 1:US RATES SNAPSHOT: 9:15 AM Eastern

Chart 1 Key:

• Far Left Columns:US Treasury Yields & Change on Day (bps)

• Center Columns:SOFR OIS Swap Spreads (bps) & Change on Day (bps)

• Far Right Columns:SOFR OIS Swap Rates & Change on Day (bps)

Please note: Market levels can change rapidly – rate cap premiums are subject to a dynamic market that can change frequently.

UST YIELDS | SWAP SPREADS | SOFR SWAP RATES

Source: Bloomberg, LLP | 9:15 AM NY Rates Snapshot

CHART 2 & 2A: SOFR SWAP RATES DIP ON FLIGHT-TO-QUALITY

SOFR swap rates are noticeably lower this morning after an AI-led equity rout spooked investors, leading to a flight-to-quality. Rates were moving materially lower until the red-hot PPI data printed, which took some of the starch out of the flight-to-quality. Swap rates ticked a touch higher after the PPI data printed but are still materially lower on the day.

US-IRAN WAR IMPACT: Key SOFR Swap Rate Movements Since the Onset of the US-Iran War  

• The 1-Year SOFR swap rate closed at 3.42% on Friday 2/27/2026 – it is currently trading at ~4.478%(+105.8 bps)

• The 2-year SOFR swap rate closed at 3.21% on Friday 2/27/2026 – it is currently trading at ~4.589%(+137.9 bps)

• The 3-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.605%(+138.5 bps)

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.591%(+137.1 bps)

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27/2026 – it is currently trading at ~4.677%(+115.7 bps)

CHART 2:SOFR OIS Swap Rates – Prior 12-Months

Source: Bloomberg, LLP | 1Y (gold line), 2Y (violet), 3Y (orange), 5Y (blue) and 10Y (white) SOFR ANNUAL OIS SWAP RATES; Year-To-Date 2026

CHART 2A:US Treasuries: Yield Overview – Prior 6-Months

Source: StreetStats | US Treasury Yields – Prior Six Months

RCA Product & Pricing Update:

Product Spotlight: What We Are Seeing in the Rates & Derivatives Markets

The market is once again facing tremendous uncertainty surrounding the path forward for interest rates. Borrowers should be as nimble as possible in this market environment. Cap purchasers should onboard as quickly as possible – there is no cost to onboard. It is important to be in a position to take advantage of market opportunities quickly and efficiently.

There is an increasing interest in exploring interest rate swaps as a possible hedge alternative. IR Swaps lock in a synthetic fixed rate and do not require an upfront premium. Unlike an interest rate cap, however, swaps are secured derivatives, so the counterparty selection process is more challenging with a swap. It is often challenging to place a swap away from the lender or incumbent relationship bank. There are also additional variables that factor into the decision to pursue an interest rate swap, or to unwind an existing swap. With the uptick in swap rates recently, we are also seeing an increase in swap termination requests. Please let us know if you would like to learn more about interest rate swaps, or swap terminations. RCA offers a full range of Derivative Advisory services.

Given the high-level of uncertainty surrounding forward rates, many clients are grappling with when or if to extend. This is a difficult question – our advice has been to monitor the market closely and be on-boarded and ready to trade, should the market move in your favor. We also advise borrowers to check the market pricing for extensions. Market price discovery is a key component to any cap transaction – new caps, extensions, or terminations.

We are still seeing some residual demand for interest rate floor indications – to offset high loan floors or simply to benefit from declining variable rates. Borrowers who have “floors” embedded in their loans have been considering purchasing a separate, stand-alone interest rate floor to offset the loan floor.

Interest Rate Cap Hub: Cap Pricing & Rate Volatility Update for 10/15/2026

• Current 1-Month SOFR = 3.93260% (Prior Day’s Reset: 3.92465%)

• Market uncertainty surrounding the path forward for interest rates remains elevated

Cap Pricing Matrix:1-Month Term SOFR Cap Premiums: Week-On-Week

*Indications as of Market Open. Premium levels provided are indications only and subject to frequent change.

CHART 3:Historical Volatility: MOVE Composite US Treasury Yield Volatility Index – Year-To-Date 2026

Source: Bloomberg, LLP | HISTORICAL US TREASURY YIELD VOLATILITY, “MOVE” INDEX – YTD 2026

^NOTE:RATE MARKETS CAN BE VOLATILE - MARKET DYNAMICS AND PRICING CAN CHANGE VERY QUICKLY IN THIS MARKET ENVIRONMENT.

**WE RECOMMEND YOU CALL US FOR ACCURATE, UP-TO-THE-MINUTE CAP INDICATIONS.**

Please contact us if you would like to discuss an upcoming rate cap or rate cap extension, explore ways to reduce or eliminate escrow deposits for replacement caps or learn more about interest rate Caps, Floors, Swaps or Swaptions. RCA can also assist you with the voluntary early termination of your cap or swap.

HedgeWithAnEdge-TheRCAEdge!

Disclaimer: The information provided in this communication is intended for discussion purposes only. Nothing presented in this communication should be taken as a recommendation or forecast. All market data shown is indicative only and subject to change depending on current market conditions. The information in this publication is confidential and is intended for the recipient only.