# Briefing — the three months to 11 September 2026

*The economy stays in overheating, and the quarter's bond moves confirm it. Long and short yields rose together in America, the euro area and Japan, and American real yields rose with them. This was not a growth scare; it was the price of money repricing higher across every major market at once. The run continued rather than broke, and the dollar softened against the yuan.*

## Equities

Equities rose over the quarter, then gave part of it back. The S&P was +3.6%<sup>1</sup> over the three months to the eleventh of September, and the Nasdaq Composite was +2.0%<sup>2</sup>. Over twelve months the gains were larger, the S&P at +16.2%<sup>3</sup> and the Nasdaq Composite at +19.5%<sup>4</sup>. The late weeks ran the other way: the S&P was -0.9%<sup>5</sup> on the month and the Nasdaq Composite -0.4%<sup>6</sup>. Both closed below their highs of the past year, the S&P at 7,656.98<sup>7</sup> against 7,798.99<sup>8</sup>.

The quarter's gain is likely to hold only if earnings keep pace with the higher cost of money. The condition to watch is the direction of long yields: further rises point to more of the late-quarter drift, while a pause in them points back to the twelve-month run.

## Monetary policy

The Federal Reserve left policy unchanged through the quarter. In July the Committee decided to "maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent"<sup>9</sup>, interrupting the earlier run of cuts. Three dissenters "preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting"<sup>10</sup>. The Committee wrote that "Inflation remains elevated relative to the Committee's 2 percent goal"<sup>11</sup>, and described the economy as "expanding at a solid pace"<sup>12</sup>. Governor Waller said in September that, if disinflation held, "I would be inclined to support holding the target for the federal funds rate at its current setting"<sup>13</sup>, adding that "if inflation comes in hot, I would consider a rate hike"<sup>14</sup>.

Continued disinflation in the August reading points to a further hold, while an upside surprise points to a rise in the target range. With the easing cycle already interrupted and dissents running towards tightening, the balance of risk has shifted away from further cuts.

## Rates and curve

American yields rose across every maturity over the three months to the middle of September. The two-year Treasury yield rose by 0.51<sup>15</sup> percentage points to 4.56<sup>16</sup>%, its highest in a year. The ten-year Treasury yield rose by 0.50<sup>17</sup> percentage points to 4.95<sup>18</sup>%. The gap between the two narrowed by 0.07<sup>19</sup> percentage points to 0.33<sup>20</sup>%. The move was in the real price of money: the ten-year inflation-protected yield rose by 0.39<sup>21</sup> percentage points to 2.55<sup>22</sup>%, while the ten-year breakeven inflation rate, the compensation investors demand for future inflation, rose only 0.07<sup>23</sup> points. The upper bound of the federal funds target was unchanged at 3.75<sup>24</sup>%.

With the policy rate held and real yields at their highs, the next move in American rates is more likely up than down.

## Credit

Investment-grade credit lost money, and the loss came from yields rather than from credit. The corporate index spread widened by 0.05<sup>25</sup> percentage points to 0.80<sup>26</sup>%, near the low end of the year's range. The high-yield spread narrowed by 0.08<sup>27</sup> percentage points to 2.70<sup>28</sup>%. The investment-grade total return index fell 2.0%<sup>29</sup> over the three months, while the high-yield index rose 0.4%<sup>30</sup>. Long duration was the cost, not default risk.

Credit is likely to keep absorbing higher yields without stress as long as high-yield spreads hold near their lows.

## Real assets and currencies

Oil led the quarter. Brent crude rose by 16.67<sup>31</sup> dollars a barrel over the three months to 109.51<sup>32</sup> dollars, with 16.25<sup>33</sup> dollars of that in the final month. Over twelve months Brent is up 42.26<sup>34</sup> dollars, so the quarter continued a run rather than starting one. The dollar went the other way: the broad trade-weighted dollar index fell 1.7%<sup>35</sup> over the three months to 118.07<sup>36</sup>. A cheaper dollar and dearer crude push imported costs up at once.

If crude holds near these levels, headline inflation will rise again into the next quarter and keep policy tight.

## Macro data

American consumer prices rose 0.5%<sup>37</sup> over the three months to August, and stood +3.0%<sup>38</sup> above a year earlier. Core personal consumption prices were up +2.9%<sup>39</sup> on the year. Growth drove the prices. The Atlanta Fed's GDPNow estimate for the third quarter reached 4.42<sup>40</sup>%, up 2.88<sup>41</sup> percentage points from the second-quarter reading. Unemployment fell by 0.10<sup>42</sup> percentage points to 4.10<sup>43</sup>%, the low of the past year, and the University of Michigan sentiment index rose 11.5%<sup>44</sup>.

Demand this strong keeps price pressure alive into the final quarter. Another quarter of core prices at this pace confirms the overheating call, while a run of flat months would mark the turn.

## United Kingdom

British gilt yields rose across the curve, and the rise reached the long end. The ten-year gilt yield stood at 5.19<sup>45</sup>%, up 0.31<sup>46</sup> percentage points over the three months and at its highest of the past year. The twenty-year yield rose 0.28<sup>47</sup> points. Bank Rate held at 3.75<sup>48</sup>%, with the Monetary Policy Committee voting by a majority of 6–3 to maintain Bank Rate at 3.75%"<sup>49</sup> and judging the risk of strong inflationary pressures was greater than the risk of weak inflationary pressures<sup>50</sup>.

If pay settlements come in above the rates consistent with target, the long end is likely to price a higher terminal rate still.

## Euro area

Euro area yields rose across the curve. The ten-year benchmark yield climbed 0.42<sup>51</sup> percentage points to 3.50<sup>52</sup>%, its highest in a year, and the two-year rose 0.49<sup>53</sup> points to 3.10<sup>54</sup>%. The policy rate did the driving, rising 0.25<sup>55</sup> percentage points to 2.25<sup>56</sup>%. The Governing Council decided "to raise the three key ECB interest rates by 25 basis points"<sup>57</sup> because "inflation is set to remain well above target for an extended period"<sup>57</sup>.

Further tightening is likely if energy costs keep feeding into services prices.

## Japan

Japanese yields rose across the curve. The two-year yield climbed by 0.40<sup>58</sup> percentage points to 1.82<sup>59</sup>%, and the ten-year by 0.24<sup>60</sup> points to 2.92<sup>61</sup>%, continuing the run of the past year. The Bank of Japan held after its June increase, saying it will encourage the overnight call rate "to remain at around 1.0 percent"<sup>62</sup>, and named the "risk of underlying CPI inflation deviating upward to a level above the price stability target"<sup>63</sup>.

Further increases in the policy rate are likely if consumer price inflation holds above the target.

## Canada

Canadian yields rose in step with the global move. The ten-year yield climbed 0.53<sup>64</sup> percentage points to 3.94<sup>65</sup>%, its highest in a year, and the two-year rose 0.54<sup>66</sup> points to 3.31<sup>67</sup>%. The Bank of Canada held its policy rate at 2.25<sup>68</sup>%, noting that "Long-term bond yields have moved up globally, including in Canada."<sup>69</sup> Unemployment eased to 6.40<sup>70</sup>%, the low of the past year.

If oil prices stay high, the Bank is likely to hold rather than cut again.

## Emerging markets

Emerging market credit spreads narrowed even as yields rose across the major bond markets. The spread on emerging market corporate bonds fell by 0.17<sup>71</sup> percentage points to 1.31<sup>72</sup>%, its lowest in a year. High-yield emerging market spreads narrowed by 0.29<sup>73</sup> points to 2.79<sup>74</sup>%. The dollar did the rest of the work, falling 2.2%<sup>75</sup> against a basket of emerging market currencies.

A weaker dollar is the condition holding these spreads down, and a turn in it would widen them again.

## Fiscal and trade policy

Trade policy tightened rather than eased, and the tightening ran through tariffs on Canada. The President found that "Canada reneged on its commitment, ceased negotiating in good faith"<sup>76</sup>, and the suspended duties took effect. A later proclamation determined that "the public interests require modifying the scope of products subject to the additional ad valorem duties"<sup>77</sup>, leaving some Canadian goods under the earlier duty and taking others out.

Tariffs applied to a close trading partner keep goods costs rising into the next quarter, which sits awkwardly with any case for lower policy rates. If Canada removes the disputed motor vehicle measures the duties lapse and the price pressure fades; if it does not, the pressure persists.

## Regime

The regime classification stayed in overheating, and the quarter did nothing to dislodge it. Growth continues to run above the model's reference path, and the prior period carried the same label. Stagflation is the only other state with meaningful weight. Strong activity, firm realised prices and a synchronised rise in long and short yields are the overheating case.

The transition weights point to overheating persisting into the next period rather than giving way. If activity falls back toward the reference path while prices stay firm, the label turns to stagflation, and if both ease together, contraction.

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