Rates Drift Lower, as AI Jitters Outweigh Higher Oil Prices

Flash Update: US RATE MARKETS – TUESDAY OCTOBER 20, 2026

• US Treasury yields and SOFR swap rates are drifting lower this morning as AI jitters outweigh rising oil prices

• Brent crude oil climbed to a five-month high (~111 per barrel) as traders weighed the threat of Iranian military strikes hampering energy flows

• Higher oil prices and fresh Middle East clashes are keeping short-end rates relatively steady as the market looks ahead to next week’s FOMC rate decision

• Renewed AI sector performance jitters are fanning a “risk off” market sentiment, leading to slightly lower rates on the back end of the curve this morning

• Traders will be paying close attention to the key tech and AI earnings reports due today and tomorrow including SpaceX and Netflix today and Meta Platforms, Inc. tomorrow

• AI-sector performance and the path forward for the FOMC will continue to captivate markets this week

• The conflict in the Middle East and the price of crude oil, and resultant fear of higher inflation will continue to be a focus for the rate markets

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

• Odds for a 25 bp rate hike in October are currently sitting at ~14.9%; Odds for a 25 bp rate increase in December dipped slightly to ~86.9%

• Fed officials remain in the pre-meeting “quiet period”; Up next: Chair Warsh’s post-meeting press conference on 10/28

• Short-term SOFR swap rates are trading down ~1-2 bps this morning, depending on tenor

• Medium-term SOFR swap rates are down ~1-3 bps currently, depending on tenor

• Long-end SOFR swap rates are trading down ~3-4 bps this morning, depending on tenor

• Elevated rate volatility is possible for the remainder of the week

Good morning – US Treasuryyields and SOFR swap rates are drifting lower, as AI jitters fan a “risk off” market sentiment. Rates, particularly on the medium and long end of the curve, dipped this morning as traders sought safe haven. Concerns surrounding AI-related data center and infrastructure investment have been building for some time, and the lackluster earnings we have seen thus far are further fueling market jitters. Markets need some tangible reassurance that the huge capex investments are generating a return. Otherwise, fears of an AI created economic slowdown will intensify. Higher back-end yields likely present an attractive haven alternative for traders and investors, hence the bigger dip in longer term rates this morning.

Right now, markets are still fearful of higher-oil induced inflation, which is preventing short-term rates from moving materially lower. Brent crude oil climbed to five-month highs overnight, but traders largely ignored it given the focus on AI earnings. This is the growing dilemma in the market – weighing the inflation risk created by sustained high oil prices vs. the potential economic growth damage a struggling AI sector could portend. I do think that the market has adequately priced in the inflation risk (for now), so the bias this week may shift toward lower rates if the “major” AI earnings reports disappoint. We may gradually see damage to economic growth become the bigger market worry. The fact that the market is ignoring the increase in oil prices is noteworthy – as we know, rates have been tightly correlated to oil prices in recent months.

Odds for a rate hike in October are stable at ~14.9%. Most market participants believe the Fed will hold rates steady in October. Although we will see plenty of “secondary” economic data prior to the Fed meeting on 10/28, virtually all the “key” economic data has already been released for the month. Next up for key data are PCE, Personal Income and Personal Spending, which are due on 10/29, a day after the Fed wraps-up their October meeting.

I expect the market to be squarely focused on the tech & AI related earnings reports due early this week, and on developments in the Middle East. Oil prices do not have much of a cushion right now – elevated oil prices as we head into the winter months in the US is not an ideal situation by any means. As far as the earnings reports are concerned, should estimates miss, we are likely to see rates dip as traders reallocate assets out of equities and into US Treasuries. As the week progresses, focus is likely to shift back to the situation in the Middle East, pending US midterm elections and next week’s Fed rate decision.

CHART OF THE DAY:

A: Markets Ignore Higher Oil Prices as AI Jitters Grab the Spotlight

Source: Bloomberg, LLP | BRENT CRUDE OIL – PRICE PER BARREL PRIOR 30 DAYS

SOFR Swap Market - Quick Summary:

• The 1Y SOFR swap rate is trading down ~1 bp this morning. 2Y and 3Y SOFR swap rates are currently trading down ~1-2 bps. 5Y and 10Y SOFR swap rates are trading down ~1-3 bps this morning. The very back-end of the swap curve (20Y and 30Y) is currently trading down ~3-4 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: 9:00 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 | 9:00 AM NY Rates Snapshot

CHART 2 & 2A: SOFR SWAP RATES DIP AS AI JITTERS GRAB MARKET’S ATTENTION

SOFR swap rates are moving lower this morning on fresh AI sector jitters. The fear of another AI “correction” was enough to force traders into haven assets, especially US Treasuries. The dip in rates this morning was noteworthy as traders ignored an uptick in crude oil price, which could signal the beginning of a shift from fear of higher inflation to fear of weaker economic growth.

I think AI jitters are likely to keep rates in check this week, particularly on the short end of the curve, given next week’s FOMC meeting. However, should the major tech earnings reports due this week materially miss expectations, we could see rates move lower in a flight-to-quality. If weaker economic growth becomes a real worry for the market and oil prices remain elevated keeping inflation fears alive, we may soon be facing “stagflation”. Whispers on that front have already started – stay tuned!

Market uncertainty, and volatility, are likely to remain elevated.

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 ~4.500%(+108.0 bps)

• The 2-year SOFR swap rate closed at 3.21% on Friday 2/27/2026 – it is currently trading at ~4.633%(+142.3 bps)

• The 3-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.653%(+143.3 bps)

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.645%(+142.5 bps)

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27/2026 – it is currently trading at ~4.722%(+120.2 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 10/20/2026

• Current 1-Month SOFR = 3.92980% (Prior Day’s Reset: 3.95082%)

• 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.

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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.