Rates Drift Lower as the US and Iran Exchange Rhetoric and Threats

Flash Update: US RATE MARKETS – THURSDAY JUNE 11, 2026

• UST yields and SOFR swap rates are drifting lower this morning, as the US and Iran exchange fresh threats and rhetoric

• Despite the renewed tension between the two sides, market participants remain optimistic progress towards an interim peace accord continues

• That is the primary reason rates are not higher this morning, especially given the hotter-than-expected May PPI results

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

• May PPI results showed wholesale inflation rose to the highest level since 2022

• Fed officials are now within the “quiet period” ahead of next week’s FOMC meeting, Kevin Warsh’s first as Fed Chairman

• Market pricing now reflects that traders expect the next Fed “move” to be a rate hike…perhaps as early as October

• 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 up ~down ~1-2 bps currently, depending on tenor

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

Good morning – US Treasury yields and SOFR swap rates are drifting a touch lower this morning, as market participants grappled with the volatile situation in the Middle East and the release of key wholesale inflation data. Overall, traders remain concerned that the war between the US and Iran that will keep energy costs elevated, fueling inflation risks.

The situation in the Middle East remains volatile, and by most tangible measurements, little progress toward an accord has been made. The situation remains in flux this morning. President Trump said earlier that the US will be hitting Iran “very hard tonight,” adding that “at some point in the not-too-distant future, we will be taking Kharg Island.” In what is shaping up to be a volatile trading session, US crude oil rose to around $91 a barrel. Despite the apparent “status quo” on peace negotiations and fresh clashes between the two sides, the trading action this morning tells me that market participants remain optimistic a peace plan will be reached in the near term – perhaps the next few days. I am not sure I am in that camp, but that optimism is the main reason rates are holding at these levels and not moving higher.

The dip in rates this morning lost steam after data showed wholesale inflation rose in May at the fastest pace in more than three years. The fallout from the Iran war continues to fan price pressures. The data showed PPI rose 6.5% from a year earlier, and 1.1% from April. Energy prices increased 10.7% in May, reflecting the impact of the war.

Bottom line right now: The overall “rate markets theme” we have been tracking recently will continue – tangible 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, is significantly delayed or worse, hostilities intensify, we are likely to get higher oil prices and higher rates. The only way we will see materially lower rates and talk of a Fed rate hike subside is a peaceful resolution to the US-Iran conflict, and soon. Make no mistake, rates can easily move higher from here if peace talks collapse or hostilities resume.

Traders are now pricing in a quarter-point Fed hike by year-end due to a stronger-than-expected labor market and higher inflation. Focus is likely to shift to the Fed as we approach next week’s FOMC meeting. The meeting is also significant as it will be Kevin Warsh’s first meeting as Chairman of the FOMC. There is a ton of speculation about what Mr. Warsh has planned for the Fed including less communication, a revised inflation target and a refinement of Fed forecasting models, to name a few. A new era begins for the Fed!

“Key News” the market is tracking includes:

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

• Kevin Warsh begins his term as Fed Chairman. He will oversee his first meeting as FOMC Chairman in June. 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 bp 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 down ~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: 9:15 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 | 9:15 AM NY Rates Snapshot

CHART 2, 2A, 2B & 2C: SOFR SWAP RATES DRIFT LOWER DESPITE ESCALATING TENSIONS IN THE MIDDLE EAST

SOFR swap rates initially dipped lower in early trading this morning, but the hotter-than-expected PPI data reversed sentiment and rates settled back to close to unchanged from last night. Back-end swap rates are down a bp or two, mainly on the slight reduction in oil prices overnight. Traders remain patient while they seek direction. The current high level of uncertainty is holding rates in a tight range. Traders are resisting the temptation to take rates higher - the inflation data released this week certainly makes a case for higher rates.

However, I think rates remain range bound for two primary reasons – one, markets are holding on tight to hope that a peace plan between the US and Iran is coming soon and two, traders may feel that they have already adequately priced in the inflation risk…for now. The longer this conflict drags on, the greater the inflation risk and the greater the possibility for higher rates.

Expect rates to remain biased higher for as long as the war-induced inflation risk remains front-and-center for market participants, and the Fed. SOFR swap rates across the curve are currently sitting at or very close to the 12-month highs.

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 ~4.001%(+79.1 bps).

• The 5-year SOFR swap rate closed at 3.22% on Friday 2/27 – it is currently trading at ~3.983%(+76.3 bps).

• The 10-year SOFR swap rate closed at 3.52% on Friday 2/27 – it is currently trading at ~4.118%(+59.8 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, Prior 6-Months

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

CHART 2C:Oil Prices Pull-Back Slightly as Hope Remains for a US-Iran Peace Accord

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

CHART 3: MAY PPI RECAP – PPI RISES TO HIGHEST LEVEL IN THREE YEARS

PPI rose in May at the fastest pace in more than three years as the fallout from the Iran war continued to fan inflation pressures. Headline PPI increased 6.5% from a year earlier and was up 1.1% month-on-month. Both were above economist’s estimates. Core CPI, which excludes more volatile food and energy prices, rose 0.4% month-on-month and 4.9% from a year earlier. Those core numbers were slightly below expectations but are still considered to be running “hot” – probably too hot for the Fed’s liking.

Forecasts are calling for higher inflation to continue, and there may be some inflationary overhang even if the conflict in the Middle East ends quicky. That could prompt the FOMC to consider an interest-rate increase this year – market pricing now implies the next Fed move will be a rate hike, perhaps as early as October.

CHART 3:May PPI Recap – PPI Prints Hotter-Than-Expected; Wholesale Inflation Reaches Highest Level in Three Years

Source: Bloomberg, LLP | MAY PPI RECAP

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 6/11/2026

• Current 1-Month Term SOFR = 3.62128% (Prior Reset: 3.62405%)

• Cap premiums are holding relatively steady this week, as traders continue to wait for a substantive update on a Middle East peace accord

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 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.