# Briefing — Q3 2026

*The quarter was a global repricing of real rates, not of inflation risk. Long US real yields, euro area and Japanese government yields all rose sharply together, while price pressure sits well below its long-run norm and activity sits near its average. The regime is benign growth with soft inflation, and the move in yields reflects term premium rather than a revived inflation problem.*

## Equities

Equities ended the quarter higher, but the gain was made before September. The broad US benchmark rose 2.0%<sup>1</sup> over the quarter and was up 11.8%<sup>2</sup> on the year to date, while the Nasdaq Composite rose 2.5%<sup>3</sup> on the quarter and 15.6%<sup>4</sup> year to date. The quarter continued the year's advance rather than extending it at pace.

The final weeks tell a different story. The broad benchmark fell 0.5%<sup>5</sup> over September while the Nasdaq gained 1.9%<sup>6</sup>. The broad index gave back ground exactly when the rise in long real yields was most pronounced and when credit spreads did most of their widening.

If long real yields stabilise, equity drawdowns are likely to stay shallow and the year-to-date gain holds. The observable that settles this is whether spread widening continues once yields steady.

## Monetary policy

US policy tightened in the quarter rather than eased. The Committee decided to "raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent"<sup>7</sup>, "by a 12 – 0 vote"<sup>8</sup>, at a point when measured price pressure had already fallen well below its long-run norm.

The stated rationale was the level of inflation and the time spent above target. The statement said "Inflation remains elevated"<sup>9</sup> and that "Today's policy action will support a timelier return to the Committee's 2 percent goal"<sup>9</sup>. Governor Cook framed it cumulatively, noting that "it has exceeded the Fed's 2 percent target for more than five years"<sup>10</sup>. Activity was described as solid: "Economic activity is expanding at a solid pace"<sup>11</sup>, with "the labor market is largely stable"<sup>12</sup>. Tightening into stable employment and soft current inflation raises the real policy rate directly.

If realised inflation stays below its long-run norm while activity holds near average, the rate reached this quarter is likely to be the peak. The observable that settles it is the path of measured inflation over the next two quarters.

## Rates and curve

The Treasury curve sold off across every maturity, and the move was concentrated in real yields. The ten-year ended at 5.29%<sup>13</sup>, up 85bp<sup>14</sup> on the quarter and 111bp<sup>15</sup> on the year; the two-year rose 74bp<sup>16</sup> to 4.88%<sup>17</sup>.

Composition is the point. Ten-year real yields rose 73bp<sup>18</sup> to 2.93%<sup>19</sup>, while breakeven inflation rose only 12bp<sup>20</sup> to 2.36%<sup>21</sup>, below its fifty-two week high of 2.50%<sup>22</sup>.

If breakevens stay near their current range while long real yields climb, the repricing is a term premium story and not an inflation story. A sustained rise in breakevens above their past-year high would overturn that reading.

## Credit

Credit spreads widened, but the move was small, late and concentrated in September. Investment grade ended at 0.84%<sup>23</sup>, up 0.08<sup>24</sup> percentage points on the quarter. High yield widened 0.37<sup>25</sup> percentage points to 3.12%<sup>26</sup>, of which 0.49<sup>27</sup> percentage points came in September alone.

The damage was in price, not credit quality. The investment grade total return index fell 3.8%<sup>28</sup> over the quarter, while high yield, with less duration, lost 1.8%<sup>29</sup>. The longest cash flows were marked down hardest and the riskiest were not.

High yield spreads taking out their fifty-two week high would point to deteriorating credit fundamentals rather than a rates story.

## Real assets and currencies

Crude was the quarter's largest move. Brent ended at $113.96<sup>30</sup> a barrel, up $43.50<sup>31</sup> over the quarter, of which $24.21<sup>32</sup> came in September, so the rise accelerated rather than faded.

The dollar did not corroborate it. The broad index was -0.5%<sup>33</sup> on the quarter, still positive on the year at +0.5%<sup>34</sup>. A softer dollar alongside doubled crude points to oil supply rather than global demand.

If crude holds near the quarter's close and the dollar stays within its recent range, headline inflation is likely to firm from here. If crude retraces toward the lower end of its twelve-month range, the rise in long yields stands as a term premium story alone.

## Macro data

US activity firmed without any matching pickup in price pressure. The Atlanta Fed nowcast stood at 3.68%<sup>35</sup> for the third quarter, up 2.14<sup>36</sup> percentage points from the second, reversing the second quarter's slowdown.

The labour market carried the growth without tightening. Payrolls added 152<sup>37</sup> thousand jobs over the quarter, and unemployment ended at 4.20%<sup>38</sup>, down 0.20<sup>39</sup> percentage points on the year. Consumer prices rose 3.4%<sup>40</sup> on the year and core PCE prices 3.0%<sup>41</sup>.

If core PCE continues at or below its current yearly pace while payroll gains hold, the rise in long yields is better read as a term premium adjustment.

## United Kingdom

Gilt yields rose across the curve, extending the rise already run this year. The ten-year ended at 5.37%<sup>42</sup>, up 0.63<sup>43</sup> percentage points on the quarter.

The policy rate did not move. The Committee voted to "maintain Bank Rate at 3.75%"<sup>44</sup>, noting that "there have continued to be clear signs of underlying disinflation in recent data"<sup>45</sup>. With the stance on hold, the yield move was priced term premium rather than policy expectations.

If underlying disinflation continues and energy prices subside, the next move in Bank Rate is more likely to be down than up.

## Euro area

Euro area yields rose sharply. The ten-year ended at 3.58%<sup>46</sup>, up 66bp<sup>47</sup> on the quarter and 63bp<sup>48</sup> on the year, so the whole of the year's increase came in these three months. The two-year rose 68bp<sup>49</sup>, making the move parallel. Real GDP was up 1.2%<sup>50</sup> on the year.

If euro area growth holds near its recent pace, the rise in long yields is likely to persist rather than reverse.

## Japan

Japanese yields rose with the front end leading: the two-year rose 57bp<sup>51</sup> to 1.95%<sup>52</sup> and the ten-year 37bp<sup>53</sup> to 3.06%<sup>54</sup>. The Bank of Japan raised the policy rate, noting that "underlying CPI inflation has been approaching 2 percent"<sup>55</sup>. The yen firmed 5.43<sup>56</sup> yen against the dollar and the Nikkei fell 4.7%<sup>57</sup>, interrupting a year still up 32.6%<sup>58</sup>.

A renewed fall in the yen would make the case for faster policy adjustment.

## Canada

Canadian yields rose, with the ten-year at 3.99%<sup>59</sup> after a gain of 61bp<sup>60</sup>, more than the whole of the year's rise. The policy rate did not move and output grew 0.8%<sup>61</sup> on the quarter. The Bank attributed the price impulse to an external source, noting that "elevated oil and fuel prices have pushed inflation above the 2% target"<sup>62</sup>.

If oil prices retrace, the inflation component of Canadian yields should fade and leave the term premium explanation standing.

## Emerging markets

Emerging market credit ended wider, but only just, and almost entirely in the final month. Investment grade EM corporate spreads closed at 1.51%<sup>63</sup>, a move of +0.05<sup>64</sup> percentage points over the quarter against +0.14<sup>65</sup> percentage points in September alone.

Currencies argue against a growth or inflation shock. The EM dollar index fell 0.7%<sup>66</sup> over the quarter and EM equity volatility fell 26.3%<sup>67</sup>.

A further widening accompanied by a stronger dollar index would point to deteriorating EM fundamentals.

## Fiscal and trade policy

Policy action in the quarter carried no fiscal or trade impulse. The executive instruments issued were administrative and public-health measures, one directing agencies to pursue "safe and effective tick and mosquito population control"<sup>68</sup>, subject to the constraint that it "shall be implemented consistent with applicable law and subject to the availability of appropriations"<sup>69</sup>.

The absence of a fiscal or trade decision leaves the rise in long yields to be explained by term premium rather than by policy supply or import costs.

## Regime

The classification shifted over the quarter from an overheating regime to a Goldilocks one, with growth close to its long-run average and price pressure well below it. That is a reversal rather than a continuation.

The driver is the inflation gap rather than the growth gap, and it sits against a policy stance still set for elevated inflation. The quarter's rise in long yields is consistent with term premium rather than with a revived inflation problem.

If the inflation gap stays below norm into the next quarter, the case for further tightening weakens. Growth near its average means the deciding observable is inflation, not activity.

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