Short-End Rates Dip on Latest War News

Flash Update: US RATE MARKETS – MONDAY MAY 18, 2026

• UST yields and SOFR swap rates are drifting lower this morning on optimism that the US and Iran were inching toward a deal to reopen the Strait of Hormuz

• Earlier today, Iranian media outlets reported that the US has proposed a temporary waiver of sanctions on Iran's oil

• However, President Trump expressed frustration with Iran and the lack of progress on a peace plan, telling Iran to "get moving, FAST, or there won't be anything left of them." He added, “the clock is ticking.”

• Ultimately, the status of the US-Iran war remains in limbo; However, the week begins with more optimism a peace deal can be reached than we witnessed last week

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

• Next up for data: No Major data is scheduled for release this week. The FOMC meeting minutes for April will be released on Wednesday 5/20 @ 2:00 PM

• The next FOMC rate decision is due on Wednesday, June 17th at 2:00 PM

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

• Medium-term SOFR swap rates are down ~1-2 bps currently, depending on tenor

• Long-end SOFR swap rates are flat to up ~1 bp this morning, depending on tenor

Good morning – US Treasury yields and SOFR swap rates are drifting a touch lower this morning, on reports from Iranian news agencies that the US has proposed a temporary waiver of sanctions on Iran’s oil. A waiver of oil sanctions is a key demand for Iran to agree to a peace deal. The news sparked optimism that the two sides are in fact negotiating towards a resolution to the conflict. The slight uptick in market optimism to start the week was enough push rates down a bp or two this morning. US officials denied the rumor, and President Trump is growing increasingly frustrated with Iranian officials. That “he said, she said” back and forth between the two sides is preventing traders from overreacting to the latest rumors and headlines. However, the rumors this morning were enough to move the “optimism” needle a touch higher.

Short-end rates have been impacted the most this morning. Long-end rates are holding relatively steady as the threat to higher inflation remains alive and well.

The overall market theme we have been tracking recently continues – 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 news and developments unfold.

Bottom-line, the uptick in rates we saw last week tells me traders are growing increasingly frustrated by the lack of progress toward a US-Iran peace deal – each day the war lingers puts more upward pressure on inflation. Eventually, economic growth will also be negatively impacted. If this latest “peace plan” optimism is once again quashed, I would not be surprised at all to see rates resume their march higher. In my opinion, the market wants to see lower rates – an end to the conflict is the answer. That said, and make no mistake, the fear of higher inflation is real, and we may only just be seeing the beginning of a bond market fearful of higher inflation.

“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.

• Kevin Warsh has been confirmed as the new FOMC Chairman. He will oversee his first meeting as Chair beginning June 16. From the market’s perspective, there are still many questions surrounding both Mr. Warsh’s monetary policy views and his plans for the central bank, and what is next for Mr. Powell.

• Market participants continue to 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.

• 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 down ~1-2 bps this morning. 2Y and 3Y SOFR swap rates are currently trading down ~1-2 bps. 5Y and 10Y SOFR swap rates are trading down ~1-2 bps on the day. The very back-end of the swap curve is currently trading flat to up ~1 bp 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: 10:00 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)

UST YIELDS | SWAP SPREADS | SOFR SWAP RATES

Source: Bloomberg, LLP | 10:00 AM NY Rates Snapshot

CHART 2, 2A, 2B, 2C & 2D: SOFR SWAP RATES DRIFT LOWER AS RUMORS FUEL US-IRAN “PEACE PLAN” OPTIMISM; HOWEVER, INFLATION FEAR REMAINS

SOFR swap rates are drifting a touch lower this morning and have come off the war-highs we set last week. An uncertain timetable for the next round of peace talks and an increasingly fragile ceasefire are keeping traders on their toes. However, rumors the US has proposed a waiver on sanctions against Iran’s oil are helping to increase optimism a peace plan can be reached. As such, rates are nudging lower this morning and oil prices are slipping lower. Progress towards a peace plan will continue to be the main short-term driver of interest rates. Actual results, or announcements that concrete results are in the works, could help to push rates significantly lower. Conversely, continued delays and/or a lack of results would likely drive rates higher, as we witnessed last week. The swap curve continues to steepen as fear of higher inflation mounts.

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 ~3.898%(+68.8 bps).

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27 – it is currently trading at ~3.961%(+74.1 bps).

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27 – it is currently trading at ~4.153%(+63.3 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

CHART 2C:Bond Yields Rise to Multi-Year Highs as Inflation Risk Augments

Source: Bloomberg, LLP | 30-YEAR US “LONG BOND” YIELD MOVEMENT SINCE 2005

CHART 2D:Inflation Fear Alters Fed Rate Expectations – Swaps Now Pricing in a Rate Hike

Source: Bloomberg, LLP | “SWAPS” IMPLIED FED RATE CUT EXPECTATIONS THROUGH 2028

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 5/18/2026

• The uncertain US-Iran war outlook, and hotter-than-expected inflation data, are pushing rates higher, leading to higher cap premiums

• Rate volatility remains relatively stable, although the rate moves last week did nudge volatility higher

• Current 1-Month Term SOFR = 3.61281% (Prior day: 3.62506%)

• 1-Month Term SOFR has been quietly drifting lower over the past two weeks and is currently sitting at a 12-month low

• The dip in 1-Month Term SOFR evidences a lack of market liquidity and tells me the market expects the Fed to be on hold for the foreseeable future

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.