Short-End Rates Edge Lower as PCE Beats Expectations

Flash Update: US RATE MARKETS – WEDNESDAY SEPTEMBER 30, 2026

• US Treasury yields and SOFR swap rates are a touch lower this morning after mixed economic data further clouded the outlook for interest rates

• The US-Iran conflict, and the price of crude oil, and fear of higher inflation continue to be the primary focus for the rate markets

• Interest rates are likely to continue to be highly correlated to the direction of oil prices for the near term

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

• Next up for “key” economic data: The September Employment Report prints Friday 10/2 at 8:30 AM

• Short-term SOFR swap rates are trading down ~1-3 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 trading up ~1-4 bps bp this morning, depending on tenor

Good morning – US Treasuryyields and SOFR swap rates are trading slightly lower this morning as a key gauge of inflation came in lower-than-expected. The surprise softer-than-expected PCE data sent rates a touch lower and curbed bets on a Fed rate hike at the October meeting. GDP was revised upward to 2.2% from the previous estimate of 1.5%. Consumer spending rose in August at the fastest pace in over a year, helping to power the economy through persistent inflation. PCE increased 0.3% from a month earlier, meeting expectations, and core PCE for August came in slightly below expectations at 0.2%. The YoY core PCE result of 3.0% surprised the market by beating expectations calling for 3.3%. Second quarter GDP advanced at a 2.2% seasonally adjusted annual rate, up from a previously reported 1.5%. Economic growth in the first quarter was also revised higher. All eyes will now shift to Friday’s release of the September Employment Report. Note: It does not feel like the dip in rates we are seeing this morning will last – it is already showing signs of fading. Despite the surprise PCE result, long-end rates are still feeling the inflation fear – they are moving higher this morning.

Overall, the data released this morning was mixed, hence the mostly muted market reaction. Yes, odds for a 25 bp rate hike in October have dropped, but that may only be temporary depending on the data we will see over the next few weeks, and on the ongoing conflict in the Middle East. Expectations for an October rate hike had been sliding lower since yesterday morning when the Fed’s John Williams said “one further upward adjustment” to the central bank’s overnight rate “may be appropriate late this year” to contain inflation. That soothed market fears that the Fed was preparing for a series of rate hikes.

The conflict in the Middle East and the price of oil will continue to be a primary driver for rates in the near term. From my perspective, the data released this morning did little to change the fundamental underlying situation the market has been facing for the past several months. It does, however, suggest to me that there is still a window of opportunity to end the Middle East conflict, lower oil prices and provide some much-needed rate relief for borrowers. There is still time to avoid any lasting damage to the economy. How long that window remains open is the question.

CHARTS OF THE DAY:

A: Economic Data Recap  

Source: Bloomberg, LLP | ECONOMIC DATA RECAP SEPTEMBER 30, 2026

B: Traders Dial Back Fed Rate Hike Bets  

Source: Bloomberg, LLP | IMPLIED FED RATE PATH EXPECTATIONS – PRIOR 7 DAYS

C: Oil Flows Through the Strait of Hormuz Quietly Ramp Up – Is It Enough for Lower Oil Prices?

Source: Bloomberg, LLP | MIDDLE EAST OIL SHIPMENTS – YTD 2026

SOFR Swap Market - Quick Summary:

• The 1Y SOFR swap rate is trading down ~1-3 bps this morning. 2Y and 3Y SOFR swap rates are currently trading down ~1-3 bps. 5Y and 10Y SOFR swap rates are trading down ~1-2 bps this morning. The very back-end of the swap curve (20Y and 30Y) is currently trading up ~1-4 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.

• 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 and more broadly, on what AI really “means” for the US and global economy. Overall market sentiment, and perhaps even economic performance, may be impacted by AI for the foreseeable future.

• Tariffs remain in focus, particularly the developing situation between the US and Canada. US/China relations are always in focus. On many levels, more tariffs are last thing global markets need right now – they are already grappling with massive inflation uncertainty due to the conflict in the Gulf.

• The US Treasury Department’s recent bond market interventions set the stage for more to come. So far, the market has shrugged off the interventions.

FOMC Update:

• Duew to the mixed economic data released this week, market implied odds for a 25 bp October Fed rate hike have dipped to ~34.9%. However, odds for a 25 bp rate hike at the December Fed meeting have jumped to ~79.2%.

• Overall, the “Fed-speak” since the prior meeting has been decidedly hawkish.

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)

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 | 9:45 AM NY Rates Snapshot

CHART 2 & 2A: SOFR SWAP RATES EDGE LOWER ON BETTER-THAN-EXPECTED INFLATION DATA

SOFR swap rates are a touch lower this morning, particularly on the Fed-sensitive short-end of the curve, after a better-than-expected PCE print showed inflation surprisingly dipped during August. Short-end rates slid lower this morning after the report was released and odds for a 25 bp rate hike at the October Fed meeting fell all the way to 34.9%. Comments from Fed officials implying only one more rate hike may be needed this year also contributed to the lower October Fed rate hike odds.

Traders are likely to shift focus to Friday’s Employment Report release, due at 8:30 AM. A strong jobs report could once again bolster Fed rate hike odds. The jobs data we have seen this week has been mixed – JOLTS was a bit weaker-than-expected, and ADP was a bit stronger-than-forecasted, so there is no clear consensus on what to expect from the Employment Report. A weak report is likely to send rates lower and further reduce Fed rate hike odds for October. A strong print could rekindle Fed rate hike expectations and send rates higher, particularly on the short end of the curve. The long end continues to be driven by inflation fears and is likely to remain impacted the most by the situation in the Middle East and the direction of oil prices.

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 ~4.524%(+110.4 bps)

• The 2-year SOFR swap rate closed at 3.21% on Friday 2/27/2026 – it is currently trading at ~4.705%(+149.5 bps)

• The 3-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.743%(+152.3 bps)

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27/2026 – it is currently trading at ~4.757%(+153.7 bps)

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27/2026 – it is currently trading at ~4.858%(+133.8 bps)

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

Source: Bloomberg, LLP | 1Y (gold line), 2Y (violet), 3Y (orange), 5Y (white) and 10Y (blue) SOFR SWAP RATES; Year-To-Date 2026

CHART 2A:US Treasuries: Yield Overview – Prior Six 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: Pricing & Volatility Update for 9/30/2026

• Current 1-Month SOFR = 3.91522% (Prior Day’s Reset: 3.90094%)

• Interest rate volatility moved significantly higher during September, as did interest rates across the curve

• 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.