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Rates, The Only Thing That is Certain is Uncertainty

By: Scott Williams

Markets entered 2026 with what appeared to be a relatively stable outlook for interest rates. The Federal Reserve had already delivered three rate cuts in 2025, inflation appeared to be moderating in a measurable way, and the futures market spent much of the first quarter pricing in an additional two to three cuts for 2026. Investors broadly believed that while rates may not fall rapidly, the general direction was finally lower.

At the time, that belief seemed reasonable.

Inflation projections for 2026 generally called for a modest increase before gradually declining again, with many economists expecting inflation to settle near the high-2% range before continuing lower. The market appeared increasingly comfortable that inflation had become manageable, economic growth was slowing but stable, and the Fed had begun the process of easing policy. Treasury yields also reflected that growing confidence.

On Friday, February 27th, the 10-year Treasury briefly fell to 3.97%, matching its 52-week low and reinforcing the idea that the market finally had a handle on the rate environment.

Less than 24 hours later, the entire narrative changed.

On Saturday, February 28th, the conflict involving the United States and Iran escalated dramatically, immediately introducing a new wave of uncertainty into global financial markets. Initially, the bond market remained relatively calm, with investors appearing to believe the conflict could be short-lived and contained. But as the conflict continued and concerns around energy supply and inflation intensified, Treasury yields moved sharply higher.

From trough to peak, the 10-year Treasury ultimately experienced nearly 50 basis points of volatility as markets reassessed the inflation outlook and the likelihood of additional Fed easing.

The move was a stark reminder of how quickly macro expectations can change.

Of course, this was not the first time investors had experienced a sudden repricing event over the past year. Less than twelve months earlier, “Liberation Day” and the announcement of sweeping tariffs created one of the most violent Treasury moves in recent memory, with nearly 70 basis points of volatility in the 10-year Treasury occurring within approximately 72 trading hours. What initially appeared to be a manageable inflation environment quickly became more complicated as investors began evaluating the ripple effects tariffs could have on supply chains, pricing pressures, and Federal Reserve policy.

The result was a market that repeatedly expected rate relief, only to encounter new developments that pushed that relief further into the future.

Throughout much of 2025, investors believed lower rates were simply a matter of time. The Fed had started cutting. Inflation was gradually improving. The economy remained resilient enough to avoid a severe downturn. So much so that by late 2025 and early 2026, many investors had become increasingly comfortable underwriting transactions with the assumption that rates would continue trending lower.

That confidence is now being tested.

The Iran conflict did not just create geopolitical uncertainty. It forced markets to confront how fragile the “lower-rate” narrative may have been all along. Concerns surrounding higher energy prices and persistent inflation have materially shifted expectations for Federal Reserve policy. Futures markets that once projected multiple cuts in 2026 have largely removed those expectations, with some scenarios now implying little to no easing in the foreseeable future.

At the same time, divisions within the Federal Reserve itself have become increasingly apparent. Recent Fed meetings produced one of the highest levels of dissent among governors in decades, with several policymakers openly signaling concern that inflation risks may now require a more hawkish posture. Reuters reported that Minneapolis Fed President Neel Kashkari warned the Iran conflict could potentially force “a series” of rate hikes if energy-driven inflation worsens, while multiple Fed officials objected to policy language that implied cuts remained the most likely next move.

Even the possibility of rate hikes, which were barely part of market discussions just months ago, underscores how dramatically sentiment has shifted.

The broader lesson for commercial real estate investors is significant.

Over the past year, markets repeatedly believed uncertainty was narrowing. Inflation appeared quantifiable. Rate cuts appeared measurable. Forward curves stabilized. Treasury yields drifted lower. Investors increasingly operated under the assumption that conditions would improve with time.

Then another unexpected event occurred.

That does not necessarily mean rates will remain elevated indefinitely. It also does not mean lower rates are impossible. What it does mean is that investors can no longer underwrite transactions based on the assumption that “things will get better.”
Deals must work in today’s environment, meaning investors need to underwrite a range of possible outcomes rather than relying on a single expected path for rates. That means evaluating scenarios where conditions improve, remain stable, or deteriorate further, and then assigning reasonable probabilities to each. The downside risk must be survivable, and the pricing of the deal has to properly compensate for uncertainty itself.
Because in today’s market, uncertainty is no longer temporary background noise.

It has become one of the most important underwriting variables in commercial real estate.