The quarterly review for Q3 2026

Equities ended the quarter higher, but the gain was made before September. The broad US benchmark rose 2.0%¹ over the quarter, to 7,651.54², and was up 11.8%³ on the year to date. The Nasdaq Composite rose 2.5%⁴ on the quarter and 15.6%⁵ year to date, closing at 26,861.06⁶. Both remain below their twelve-month highs of 7,798.99⁷ and 27,244.28⁸. The quarter continued the year's advance rather than extending it at pace.

The final weeks tell a different story from the quarter as a whole. The broad US benchmark fell 0.5%⁹ over September and fell 0.7%¹⁰ in the closing week, while the Nasdaq gained 1.9%¹¹ on the month and fell 0.3%¹² in that same week. So 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. The divergence between a flat broad index and a firmer technology-weighted index narrows the claim that equity pricing was untroubled: discount-rate pressure showed up at the index level late, and it showed up alongside credit, not in isolation.

If long real yields stabilise, the quarter's pattern suggests equity drawdowns stay shallow and the year-to-date gain holds. If real yields keep rising while credit spreads widen further, the September weakness in the broad index is likely to extend rather than reverse. The observable that settles this is whether spread widening continues once yields steady.

US policy tightened in the quarter rather than eased. The Committee raised its policy rate at the September meeting, deciding to "raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent"¹³, a step taken by unanimous vote, "by a 12 – 0 vote"¹⁴. That continued the direction of travel in short rates at a point when measured price pressure had already fallen well below its long-run norm, so the quarter's policy move ran ahead of, rather than behind, the inflation data.

The stated rationale was the level of inflation and the time it has spent above target, not a fresh acceleration. The statement said "Inflation remains elevated"¹⁵ and that "Today's policy action will support a timelier return to the Committee's 2 percent goal"¹⁵. Governor Cook framed the same point cumulatively, noting that "it has exceeded the Fed's 2 percent target for more than five years"¹⁶, and committing to "returning inflation to our objective while preserving the strength in the labor market"¹⁶. The activity side described was solid rather than strained: "Economic activity is expanding at a solid pace"¹⁷, while "Job gains have kept pace with the workforce, and the unemployment rate has changed little"¹⁷ and "the labor market is largely stable"¹⁸. A policy tightening justified by an accumulated overshoot, delivered into stable employment and soft current inflation, raises the real policy rate directly; that is the channel through which the quarter's long-yield move was a real-rate event.

If realised inflation stays below its long-run norm while activity holds near average, the policy rate reached this quarter is likely to be the peak and the reconciliation falls to the inflation data rather than to the rhetoric. If instead the decline in price pressure stalls, the stated commitment points to further increases and to a higher real rate still. The observable that settles it is the path of measured inflation over the next two quarters.

The Treasury curve sold off hard across every maturity in the third quarter, and the move was concentrated in real yields. The ten-year note ended the quarter at 5.29%¹⁹, up 85bp²⁰ on the quarter and 111bp²¹ on the year, closing at its highest level of the past year at 5.29%²². The thirty-year rose 73bp²³ over the quarter to 5.64%²⁴, also a fifty-two week high, while the two-year rose 74bp²⁵ to 4.88%²⁶. The curve steepened modestly, with the ten-year minus two-year spread up 11bp²⁷ to 0.41%²⁸, which only partly reverses a year-to-date narrowing of 30bp²⁹.

The composition of the move is the point. Ten-year real yields rose 73bp³⁰ over the quarter to 2.93%³¹, the highest level in the past year, and are up 100bp³² year to date. Ten-year breakeven inflation rose only 12bp³³ over the quarter to 2.36%³⁴, and 11bp³⁵ on the year, leaving it below its fifty-two week high of 2.50%³⁶. Policy accounts for part of the front end: the upper bound of the federal funds target was raised 25bp³⁷ over the quarter to 4.00%³⁸, the only change in the target this year.

If breakevens stay near their current range while long real yields continue to climb, the repricing is a term premium story and not an inflation story. A sustained rise in breakevens above their past-year high would be the observation that overturns that reading. With the policy rate still below its past-year peak, further tightening would push the front end rather than the long end.

Credit spreads widened in the third quarter, but the move was small, late and concentrated in September. Investment grade spreads ended at 0.84%³⁹, up 0.08⁴⁰ percentage points on the quarter and 0.05⁴¹ percentage points on the year, still below their fifty-two week high of 0.94%⁴². High yield widened 0.37⁴³ percentage points on the quarter to 3.12%⁴⁴, of which 0.49⁴⁵ percentage points came in September alone, reversing the narrowing that had taken the series to a fifty-two week low of 2.60%⁴⁶. The quarter interrupted the compression of the first half rather than breaking the range.

The damage was in price, not in credit quality. The investment grade total return index fell 3.8%⁴⁷ over the quarter and 2.8%⁴⁸ on the year, closing at its fifty-two week low of 3,487.27⁴⁹, a loss driven by duration rather than default risk. High yield, with less duration, lost 1.8%⁵⁰ on the quarter and was flat on the year. That split is what a repricing of real rates looks like: the longest cash flows were marked down hardest, and the riskiest were not, which is why equity pricing held while credit index levels fell.

If the September widening in high yield extends into the fourth quarter while investment grade spreads stay inside their range, the move is still a rates story. High yield spreads taking out their fifty-two week high would point instead to deteriorating credit fundamentals.

Crude was the quarter's largest move in this section. Brent ended at $113.96⁵¹ a barrel, up $43.50⁵² over the quarter and $52.61⁵³ over the year to date, leaving it near the twelve-month high of $138.21⁵⁴ and far above the low of $59.93⁵⁵. West Texas Intermediate followed, closing at $96.16⁵⁶ after a gain of $25.60⁵⁷ on the quarter and $38.90⁵⁸ on the year. September carried most of it: Brent added $24.21⁵⁹ in the month, so the quarter's rise accelerated rather than faded.

The dollar did not corroborate the energy move. The broad index was -0.5%⁶⁰ on the quarter and the advanced-economy index -0.3%⁶¹, both still positive on the year at +0.5%⁶² and +2.4%⁶³ respectively, with a September recovery of 1.5%⁶⁴ and 1.6%⁶⁵ reversing part of the earlier slippage. A dollar that softened while crude doubled its quarterly pace points to oil supply rather than global demand or a shift in the relative stance of policy.

An energy move of this size is the clearest route by which measured inflation could stop falling, which is the condition that would turn the current reading of price pressure into a live constraint again. If crude holds near the quarter's close and the dollar stays within its recent range, headline inflation is likely to firm from here even as the underlying regime stays one of steady activity. If crude instead retraces toward the lower end of its twelve-month range, the soft inflation reading persists and the rise in long yields stands as a term premium story alone.

US activity firmed through the quarter without any matching pickup in price pressure. The Atlanta Fed nowcast stood at 3.68%⁶⁶ for the third quarter, up 2.14⁶⁷ percentage points from the second, and it sits at the top of its own range of the past year at 3.68%⁶⁸ against a low of 1.24%⁶⁹. That reverses the slowdown of the second quarter, though the nowcast was still -0.56⁷⁰ percentage points against the fourth quarter of last year, which places the quarter near its average rather than above it.

The labour market carried the growth without tightening. Payrolls added 152⁷¹ thousand jobs over the quarter and 612⁷² thousand over the year to date, reaching 159,044⁷³ thousand, the high of the past year. Unemployment did not move over the quarter, ending at 4.20%⁷⁴ after a rise of 0.10⁷⁵ percentage points in the final month, and was down 0.20⁷⁶ percentage points on the year. Inflation did not accelerate with activity: consumer prices rose 3.4%⁷⁷ on the year and 0.4%⁷⁸ on the month, while core PCE prices rose 3.0%⁷⁹ on the year and 0.2%⁸⁰ on the month. Consumer sentiment recovered 4.4%⁸¹ over the quarter to 51.70⁸² but was still down 2.3%⁸³ on the year.

If core PCE continues to run at or below its current yearly pace while payroll gains hold, the rise in long yields is better read as a term premium adjustment than as a repricing of inflation. A renewed fall in unemployment alongside faster monthly core prints would point the other way.

Gilt yields rose across the curve in the third quarter, extending rather than interrupting the rise already run this year. The ten-year gilt ended at 5.37%⁸⁴, up 0.63⁸⁵ percentage points on the quarter and 0.90⁸⁶ points on the year, within reach of its twelve-month high of 5.38%⁸⁷. The five-year rose 0.64⁸⁸ points and the twenty-year 0.48⁸⁹ points, so the move was led by the front and belly rather than the very long end.

The policy rate did not move: Bank Rate was unchanged on the quarter at 3.75%⁹⁰ and overnight SONIA was unchanged at 3.73%⁹¹. The Committee voted to "maintain Bank Rate at 3.75%"⁹², noting that "there have continued to be clear signs of underlying disinflation in recent data"⁹³. Sterling was little changed over the quarter at 1.3250⁹⁴ dollars, though it fell 0.0300⁹⁵ in September. With the stance on hold and inflation pressure easing, 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. Evidence of second-round effects in pay settlements would point the other way and keep front-end yields rising.

Euro area yields rose sharply across the curve in the third quarter. The ten-year ended at 3.58%⁹⁶, up 66bp⁹⁷ on the quarter and 63bp⁹⁸ on the year, which means the whole of the year's increase came in these three months after a flat first half. The two-year rose 68bp⁹⁹ over the quarter to 3.16%¹⁰⁰, so the move was parallel rather than a repricing of near-term policy alone. Activity was steady, with real GDP up 1.2%¹⁰¹ on the year and 0.6%¹⁰² on the quarter, and consumer prices rose 3.2%¹⁰³ on the year.

Credit and the currency confirm that this was a rates event rather than a growth scare. High yield spreads widened 30bp¹⁰⁴ over the quarter to 3.00%¹⁰⁵, and the euro was -0.0017¹⁰⁶ dollars on the quarter. The ECB's supervisory agenda stayed with resilience, stating that "The timely and full implementation of Basel III therefore remains critical"¹⁰⁷.

If euro area growth holds near its recent pace, the rise in long yields is likely to persist as a term premium adjustment rather than reverse. A fall in the annual inflation rate alongside further long-end increases would confirm that reading; a renewed acceleration in prices would overturn it.

Japanese yields rose across the curve in the third quarter, with the front end leading. The two-year rose 57bp¹⁰⁸ to 1.95%¹⁰⁹, the ten-year rose 37bp¹¹⁰ to 3.06%¹¹¹, and the thirty-year rose 22bp¹¹² to 4.10%¹¹³. That continued a year-long repricing: the ten-year is up 99bp¹¹⁴ on the year, close to its high of 3.08%¹¹⁵.

The Bank of Japan raised the policy rate in September, noting that "underlying CPI inflation has been approaching 2 percent"¹¹⁶ and that "Japan's financial conditions have been accommodative"¹¹⁶. The yen firmed 5.43¹¹⁷ yen against the dollar over the quarter, and the Nikkei fell 4.7%¹¹⁸, interrupting a year still up 32.6%¹¹⁹. Unemployment was 2.40%¹²⁰ in July.

Further front-end repricing depends on whether underlying inflation settles at the target rather than above it. A renewed fall in the yen would make the case for faster policy adjustment.

Canadian yields rose across the curve in the third quarter, with the ten-year at 3.99%¹²¹ after a gain of 61bp¹²² on the quarter, which took it to its highest level of the past year and accounted for more than the whole of the 57bp¹²³ rise since the year began. The two-year added 63bp¹²⁴, extending a run that reaches 79bp¹²⁵ year to date. The policy rate did not move at any point in the quarter.

The move was not a policy move and not an activity move. Real output grew 0.8%¹²⁶ on the quarter and 1.1%¹²⁷ on the year, and unemployment eased to 6.40%¹²⁸, down 0.40¹²⁹ percentage points since December. The Bank attributed the price impulse to an external source, noting that "elevated oil and fuel prices have pushed inflation above the 2% target"¹³⁰.

If oil prices retrace, the inflation component of Canadian yields should fade and leave the term premium explanation standing. A further rise in the long end alongside an unchanged policy rate would confirm that the repricing is of real rates rather than of expected policy.

Emerging market credit ended the quarter wider, but only just, and the widening came almost entirely in the final month. Investment grade EM corporate spreads closed at 1.51%¹³¹, a move of +0.05¹³² percentage points over the quarter against +0.14¹³³ percentage points in September alone, and they remain -0.05¹³⁴ percentage points on the year. High yield EM spreads tell the same story, at 3.19%¹³⁵ after a quarterly change of +0.08¹³⁶ percentage points and a monthly one of +0.29¹³⁷ percentage points.

The currency side argues against a growth or inflation shock. The EM dollar index fell 0.7%¹³⁸ over the quarter, the won strengthened 192.27¹³⁹ won per dollar, and EM equity volatility fell 26.3%¹⁴⁰ on the quarter even after rising 11.2%¹⁴¹ in September. The late-quarter widening coincided with the repricing of global duration rather than with weaker EM currencies.

If EM spreads retrace the September widening while currencies hold, the move was a term premium effect rather than a credit one. A further widening accompanied by a stronger dollar index would instead point to deteriorating EM fundamentals.

Policy action in the quarter carried no fiscal or trade impulse. The executive instruments issued late in the quarter were administrative and public-health measures rather than taxing, spending or tariff decisions, and so added nothing to the supply of government paper or to the price of traded goods. One directed agencies to pursue "safe and effective tick and mosquito population control"¹⁴², with implementation subject to the standard constraint that it "shall be implemented consistent with applicable law and subject to the availability of appropriations"¹⁴³. A second confined itself to nomenclature, directing the executive branch to use "“Super Intelligence” and “SI” in place of “Artificial Intelligence” and “AI”"¹⁴⁴. A further action withdrew pending nominations from the Senate.

The absence of a fiscal or trade decision in the quarter leaves the rise in long yields to be explained by term premium rather than by policy supply or import costs. That reading holds unless a subsequent borrowing or tariff announcement reaches the pack, which would point the other way.

The classification shifted over the quarter from an overheating regime to a Goldilocks one, with growth sitting close to its long-run average and price pressure well below it. That is a reversal rather than a continuation: the prior reading had inflation above norm and the labelling now places the dominant weight on benign growth with soft inflation. The alternative readings, including contraction, carry materially less weight, and the transition probability into the benign state dominates the others.

The driver is the inflation gap rather than the growth gap. Growth barely moved from its average, so the whole of the regime change comes from price pressure falling below norm. This sits against a policy stance still set for elevated inflation: the measured gap is backward-looking in the sense that it reflects realised prices, while the policy rate reflects a judgement that disinflation is not yet secure. Both descriptions can hold at once, and 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 policy tightening weakens. If instead realised price pressure stops falling, the regime reading is likely to revert toward the prior overheating state. Growth near its average means the deciding observable is inflation, not activity.