Rates Edge Lower as Market Assesses Middle East Risk

Flash Update: US RATE MARKETS – THURSDAY JULY 9, 2026

• UST yields and SOFR swap rates are drifting lower this morning as market participants anxiously assess the risk in the Middle East

• Renewed hostilities between the two sides have cast doubt on the ceasefire agreement and rekindled fear of a return to war

• Markets remain extraordinarily patient; Oil prices are relatively steady and rates remain range bound

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

• The FOMC meeting minutes for June showed an overall hawkish Fed worried about the direction of inflation

• Next up for data: June CPI data will be released on Tuesday, 7/14 at 8:30 AM

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

• Medium-term SOFR swap rates are down ~2-4 bps currently, depending on tenor

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

Good morning – US Treasury yields and SOFR swap rates are a touch lower this morning, particularly on the short-end and “belly” of the yield curve. The slight dip in rates this morning feels like a mini flight-to-quality while the market assesses the risk in the Middle East. Uncertainty peaked again as hostilities resumed between the two sides, bolstered by strong US rhetoric. As I have been mentioning, the market remains patient – that is what is keeping rates generally range bound this week. Overall, the market reaction to the headlines has been mostly muted – rates crept higher yesterday, but nothing dramatic. Apparently, traders are cutting through the rhetoric and knee-jerk reactions and holding out hope the two sides will continue to move toward a permanent peace agreement. I expect a slightly rockier path moving forward. I am also not confident that this dip in rates will last.

Uncertainty is also continuing to help flatten the yield curve. The 2’s/10’s swap spread is a very narrow 10 bps currently. Rates on the short end of the yield curve remain tightly bunched up as the market weighs the path forward for the Fed, and a host of other potential market catalysts.

The FOMC meeting minutes released yesterday showed a hawkish Fed very worried about inflation, and about the economic and geopolitical uncertainty created by the US-Iran war. The minutes showed that nine of 19 participants at the June FOMC meeting expected at least one rate hike this year. That was one of the largest hawkish surprises since the Fed launched its latest hiking cycle in 2022. Bottom line for me: I think we could see a rate hike this year if the conflict in the Middle East drags on and price pressure continues, but I still believe the Fed will remain “on hold” for as long as possible to avoid negatively impacting economic growth and/or the labor market.

Oddly, market expectations for inflation have been declining – that is another reason rates remain range bound despite renewed hostilities between the two sides. Ti me it still feels like the market wants to be optimistic – let’s hope we see that optimism rewarded with some tangible progress toward peace in the Middle East.

Market Implied Inflation Expectations Are Dropping – Will It Be Enough to Hold Off a Fed Rate Hike?

Source: Bloomberg, LLP | MARKET IMPLIED INFLATION EXPECTATIONS

“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.

SOFR Swap Rate Summary: The 1Y SOFR swap rate is trading down ~3-4 bps this morning. 2Y and 3Y SOFR swap rates are currently trading down ~3-4 bps. 5Y and 10Y SOFR swap rates are trading down ~2-4 bps this morning. The very back-end of the swap curve is currently trading down ~1-2 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: 10:30 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 | 10:30 AM NY Rates Snapshot

CHART 2, 2A, 2B & 2C: SOFR SWAP RATES A TOUCH LOWER AS MARKET CLOSELY MONITORS NEW DEVELOPMENTS IN THE MIDDLE EAST

SOFR swap rates are ticking a touch lower this morning, as traders park assets in US Treasuries while they assess the new developments in the Middle East. The market is getting more practiced about reacting to rumors and headlines – that is a positive on some levels, but it also underscores that the market simply does not know what to believe! The ever-shifting rhetoric, “crying wolf” and unmet deadlines are creating a new level of market uncertainty regarding the outlook for the conflict in the Middle East. There does not seem to be a quick, or easy way out of the conflict for the US. I said it yesterday and feel it even more strongly this morning; Should tension in the Middle East ramp back up, rates are likely to continue to creep higher. If the ceasefire collapses and/or oil prices march higher, SOFR swap rates are likely to follow close behind.

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 ~4.036%(+82.6 bps).

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27 – it is currently trading at ~4.002%(+78.2 bps).

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27 – it is currently trading at ~4.136%(+61.6 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)

CHART 2C:Crude Oil Prices Tick Higher on Renewed US-Iran Hostilities

Source: Bloomberg, LLP | BRENT CRUDE OIL PRICES SINCE JULY 2025

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 7/9/2026

• Current 1-Month SOFR = 3.67035% (Prior Day’s Reset: 3.66876%)

• Cap premiums are bouncing around in a tight range, but continue to creep higher as SOFR swap rates increase

• Rate volatility remains relatively subdued as the market weighs a host of market variables

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.

^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.

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.