Rates Drift Higher as War Outlook Clouds

Flash Update: US RATE MARKETS – MONDAY MAY 11, 2026

• UST yields and SOFR swap rates are drifting higher this morning as the latest US peace proposal was rejected by Iran

• President Trump called Iran’s response to the US peace plan “unworkable”

• The two sides remain far apart on a framework to end the war and reopen the Strait of Hormuz

• Market participants and traders have shifted into a “wait-and-see” mode as they anxiously monitor war developments and prepare for tomorrow’s CPI release

• The US/Iran war remains the primary focus for the rate markets

• Next up for Key Data: April CPI is due for release tomorrow, 5/12 at 8:30 AM

• Short-term SOFR swap rates are trading up ~1-3 bps this morning, depending on tenor

• Medium-term SOFR swap rates are up ~2-3 bps currently, depending on tenor

• Long-end SOFR swap rates are up ~2-3 bps this morning, depending on tenor

Good morning – US Treasury yields and SOFR swap rates are drifting higher this morning, as the market pauses to assess the outlook for the US-Iran war. The market’s optimism that a peace deal could be reached soon has been shaken by the latest diplomatic failure. Over the weekend, Iran rejected the latest US peace plan, and President Trump called Iran’s response “unworkable”. The two sides remain far apart on a framework to end the conflict and reopen the critical Strait of Hormuz.

Today’s rate move follows the market theme we have been tracking recently: progress towards a US/Iran peace deal and/or lower oil prices will likely lead to lower rates and more stable markets. Conversely, if we see indications that the peace deal will not happen, the next round of negotiations is significantly delayed or hostilities resume, we are likely to get higher oil prices and higher rates. Traders will continue to anxiously monitor war developments as the “negotiation” news unfolds.

Tomorrow at 8:30 AM, market participants will see CPI results for April. Given the renewed focus on inflation due to the war in the Middle East, traders will be paying close attention to the inflation data we see this week (note: April PPI is released on Wednesday, 5/13 at 8:30 AM). Markets are growing increasingly worried that, should the war drag on, and oil prices remain elevated, the Fed’s next move may be a rate hike. A lower-than-anticipated CPI result tomorrow could push rates lower. Conversely, should CPI miss expectations to the upside, inflation “fear” will intensify, and rates are likely to tick higher.

Expectations for tomorrow’s CPI results are as follows: Headline MoM, 0.6% (vs. 0.9% the prior month); Core MoM, 0.3% (vs. 0.2% prior); Headline YoY, 3.7% (vs. 3.3% prior); Core YoY, 2.7% (vs. 2.6% prior). Given the uncertain war outlook, I do not expect CPI to dramatically move the market. However, a higher-than-expected CPI result tomorrow would further underscore the threat of higher inflation that we are now facing. As we know, consumers have been grappling with higher gasoline prices since the onset of the war.

“Key News” the market is tracking includes:

• Geopolitical developments continue to weigh on markets.The US/Iran “war” continues to dominate market sentiment this week.

• The US Justice Department has dropped the investigation into the US Central Bank and Chairman Powell, likely clearing the way for Kevin Warsh to be confirmed as the next FOMC Chairman.From the market’s perspective, there are still many questions surrounding both Mr. Warsh’s monetary policy views, and what is next for Jay Powell.

• Market participants continue to closely track developments in the US equities markets. There is still a sharp focus on the performance of the growing AI sector. Overall market sentiment, and perhaps even economic performance, could be impacted by “tech” earnings for the foreseeable future.

• Traders are growing increasingly concerned with the record-setting “partial” government shutdown currently underway. Traders are still hoping the situation is resolved quickly.

• SCOTUS is currently ruling on the legality of the President firing of the Fed’s Lisa Cook. There are some reports stating that SCOTUS is nearing a final decision on that case, which could have far reaching implications for the US Central Bank.

SOFR Swap Rate Summary: The 1Y SOFR swap rate is trading up ~1-2 bps this morning. 2Y and 3Y SOFR swap rates are currently trading up ~2-3 bps. 5Y and 10Y SOFR swap rates are trading up ~2-3 bps on the day. The very back-end of the swap curve is currently trading up ~2-3 bps from Friday’s closing levels.  

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

CHART 1:US RATES SNAPSHOT: 9:45 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)

UST YIELDS | SWAP SPREADS | SOFR SWAP RATES

Source: Bloomberg, LLP | 9:45 AM NY Rates Snapshot

CHART 2, 2A & 2B: SOFR SWAP RATES EDGE HIGHER AS IRAN REJECTS US PEACE PLAN, CLOUDING WAR OUTLOOK HIGHER

SOFR swap rates are drifting a touch higher this morning as traders pause to assess the outlook for the US-Iran war. Market participants had been growing increasingly optimistic that a peace plan would be reached between the US and Iran. This weekend’s news that the Iran had rejected the latest US peace proposal disappointed market participants. Rates move higher this morning in response. The longer the Strait of Hormuz remains closed, the greater the risk for sustained higher oil prices and for now, higher rates. Traders remain cautious, so I expect the jittery market to continue.

Key SOFR Swap Rate Movements Since The US-Iran War Began:

• The 2-year SOFR swap rate closed at 3.21% on Friday 2/27 – it is currently trading at ~3.749%(+53.9 bps).

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27 – it is currently trading at ~3.756%(+53.6 bps).

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27 – it is currently trading at ~3.979%(+45.9 bps).

CHART 2:Short-End SOFR Swap Rates – Since 2/27/2026 (Start of War)

Source: Bloomberg, LLP | 1Y (white), 2Y (blue) & 3Y (orange) SOFR SWAP RATES; SINCE 2/27/2026

CHART 2A:Long-End SOFR Swap Rates – Since 2/27/2026 (Start of War)

Source: Bloomberg, LLP | 5Y (green), 7Y (purple) & 10Y (light blue) SOFR SWAP RATES; SINCE 2/27/2026

CHART 2B:US Treasuries: Yield Overview Since November 2025

Source: StreetStats | US Treasury Bill, Note & Bond Yields; Prior 6-Months

RCA Product & Pricing Update:

Product Spotlight: What We Are Seeing In The Rates & Derivatives Markets

The market is 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.

Given the uncertainty that still remains about 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, similar to how you purchased the original cap. Market pricing discovery is a key component to any cap transaction – new caps, extensions or terminations.

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, swaps are secured derivatives, so the counterparty selection process is more challenging with a swap. There are also additional variables that factor into the decision to pursue an interest rate swap, or to unwind an existing swap. We are also seeing a dramatic increase in swap termination advisory requests recently, as clients contemplate refinancings. Lower rates have sparked refinancing activity, which in some cases necessitates unwinding an existing swap. Please let us know if you would like to learn more about interest rate swaps, or swap 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: Pricing & Volatility Update for 5/11/2026

• The uncertain US-Iran war outlook is once again pushing rates higher, leading to slightly higher cap premiums to start the week

• Rate volatility remains relatively subdued, as the market participants and traders move into a “wait-and-see” mode

• Current 1-Month Term SOFR = 3.63229% (Prior day: 3.63792%)

Pricing Matrix:1-Week Movement In 1-Month Term SOFR Cap Premiums

*Indications as of market open. Premium levels provided are indications only and subject to change.

^NOTE: 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.