Rates Tick Higher as Inflation Fear Mounts

Flash Update: US RATE MARKETS – FRIDAY JULY 31, 2026

• UST yields and SOFR swap rates are a touch higher this morning as inflation fears mount

• The three dissenting FOMC voters warned that waiting too long to act against inflation could risk the need for even more aggressive policy later

• Hawkish Fed-speak, sustained high oil prices and an above expectation ECI print are all contributing to the uptick in rates this morning

• An escalation in military hostilities between the US and Iran continues to dampen hopes for a quick resolution to the Middle East conflict

• The US-Iran conflict remains the primary driver for the rate markets

• Equity markets will also remain in focus as pressure on the tech sector continues – Chipmakers and AI names remain most vulnerable

• The next FOMC rate decision is due on Wednesday, September 16th at 2:00 PM

• Odds for a 25 bp rate hike at the September FOMC meeting are currently sitting at ~65%

• Next up for key data: The August Employment Report is due for release on Friday, 8/6 at 8:30 AM

• There is a full plate of secondary economic data due next week including ISM Manufacturing (8/3), JOLTS (8/4) & ADP Employment Change (8/5)

• Short-term SOFR swap rates are trading up ~3-5 bps this morning, depending on tenor

• Medium-term SOFR swap rates are up ~4-5 bps currently, depending on tenor

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

Good morning – US Treasury yields and SOFR swap rates are ticking higher this morning. Hawkish Fed-speak, sustained high oil prices and a slightly higher-than-expected Employment Cost Index (ECI) are all contributing to higher rates this morning. Escalating hostilities in the Middle East continue to weigh on the market this morning, and oil prices are holding above $90 a barrel.

2Q ECI rose 0.9%, vs. expectations calling for 0.8%. Generally, a reading above 0.6% is interpreted as inflationary. Overall, the US labor market is in good shape, so the slight expectation miss is not a major concern, but it does underscore the overall “higher inflation” theme we have been hearing since the onset of the Gulf conflict.

The three dissenting FOMC voters all hit the tape this morning – 2 of the 3 dissenters said that they favored a rate hike now to combat inflation before it becomes entrenched. They both expressed a concern that waiting will mean more aggressive policy will be required to lower inflation. “The longer that high inflation persists, the more challenging and costly it can be to bring it back down,” Cleveland Fed President Hammack said in a statement released this morning. Minneapolis Fed President Kashkari said in a separate statement that to manage against the risk of high inflation becoming entrenched, he “would rather tighten policy incrementally as we gather more data on the path of inflation and employment.” The path forward for the Fed remains an open question – what we do know, is we currently have a divided Fed.

Rates bounced around this week but are overall holding in a relatively narrow range – approximately 10 bps. The 2-year SOFR swap rate started the week at 4.174% and is currently trading at 4.145%. The 10-year swap rate opened on Monday at 4.250%, and it is now trading at 4.287%. The mixed rate moves this week resulted in a steeper yield curve. Overall, swap rates moved higher during the month of July.

Market uncertainty regarding the path forward for interest rates remains at elevated levels – I expect uncertainty to remain elevated for the foreseeable future. Expect increased volatility and a steeper yield curve for the near term as traders sort through the myriad market forces currently at work.

SOFR IR Swap Rates – Prior 30 Days (July 2026)

Source: Bloomberg, LLP | SOFR SWAP RATES – PRIOR 30 DAYS

“Key News” the market is tracking includes:

• Geopolitical developments continue to weigh on markets.Developments in the US/Iran “war” will continue to dominate market sentiment.

• 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.

• Tariffs are once again in focus, as President Trump implements a new round of tariffs and threatens more are coming. This is the last thing global markets need right now – they are already grappling with massive inflation uncertainty due to the conflict in the Gulf. This is a developing story, so the market impact is undetermined currently.

• The possibility exists we may be facing another government shutdown soon. Lawmakers have reached a temporary compromise to avert a shutdown for now, but the threat of another government shutdown looms.

SOFR Swap Rate Summary:

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

CHART 2, 2A & 2B: SOFR SWAP RATES TICK HIGHER AS INFLATION FEARS MOUNT

SOFR swap rates are up this morning – it is more of the same market theme, only now we have a Fed component to add to the uncertainty index. Oil prices above $90 a barrel, a divided Fed, and an unclear path forward in the Middle East are all contributing to higher rates this morning.

Focus is likely to remain on the US-Iran war as we head into next week, along with the added uncertainty created by the tight-lipped FOMC. The employment data on 8/6 will also grab the market’s focus later in the week.

Market participants will continue to anxiously monitor the host of market forces at work. Cautious uncertainty surrounding the conflict in the Middle East, the sustainability and veracity of tech sector equity valuations, the growing US deficit, and the path forward for the FOMC are making it extremely challenging to chart the path forward for swap rates currently.

US-IRAN WAR IMPACT: 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 ~4.148%(+93.8 bps)

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27 – it is currently trading at ~4.141%(+92.1 bps)

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27 – it is currently trading at ~4.287%(+76.7 bps)

CHART 2:Short-End SOFR Swap Rates – Year-To-Date 2026

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

CHART 2A:Long-End SOFR Swap Rates – Year-To-Date 2026

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

CHART 2B: US Treasuries: Yield Overview – Year-To-Date 2026

Source: StreetStats | US Treasury Yields; YTD 2026 (30Y UST yield – top line; 10Y UST yield – middle line; 2Y UST yield – bottom line)

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.

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, 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 7/31/2026

• Current 1-Month SOFR = 3.70560%(Prior Day’s Reset: 3.73087%)

• Overall, volatility remains relativelysubdued despite the myriad market forces at work

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.