Political change, persistent inflation and Middle East tensions shaped the quarter. Interest rate rises and substantial government borrowing put bonds under pressure, while enthusiasm for artificial intelligence helped shares remain resilient. The UK’s Autumn Budget, concentrated technology leadership and unresolved trade tensions leave plenty for investors to watch into year end.
Another summer, another UK PM, with Andy Burnham ascending (but geographically descending) to the top political job. Sir Keir Starmer (remember him?) was quietly smuggled out the back door as Andy raced, whippet-like, through the front. September’s Labour conference revealed ambitions to knock a lock off the triple lock (now say that ten times) from 2030 to help fund a National Care Service and reassess our relationship with the EU (in, out, shake it all about). October’s Autumn Budget will reveal more on tax and spending, although the rumour mill hints that this new/old/new Labour is looking, in classic fashion, to do more of both.
Beyond Westminster, hostilities in the Middle East repeatedly frustrated US-Iran negotiations to restore shipping through the Strait of Hormuz. Oil and gas prices remained volatile – with at the pump prices feeding inflation.
The inflation surge of 2022 still haunts central bankers. Having been slow to respond then, they are keen to avoid being caught with their trousers down again. With inflation persistent, the US Federal Reserve and European Central Bank each raised rates by a quarter-point in September. The Bank of England held at 3.75%, though three of its nine members wanted an increase. The cuts anticipated at the year’s start have given way to concerns about further rises. In the murky pond of bonds, the inflation ripple was keenly felt. Government bond yields rose and prices fell. Longer-dated bonds were particularly exposed, with 30-year gilt yields reaching yield levels last seen in 1998, touching 6%. Globally, inflation concerns and elevated government borrowing kept bonds under pressure. Shares proved more resilient, buoyed by enthusiasm for our soon-to-be robot overlords, artificial intelligence (AI). That joke seems less far-fetched by the day; time to stock up on dried noodles and canned soup. August results from Nvidia, a leading AI chip designer, showed extraordinary demand. Whether the vast sums invested will earn adequate returns remains a fair question, while reliance on a handful of technology companies leaves markets sensitive to disappointment. Finally, tariffs remain, happily for Trump and unhappily for most others, firmly in the picture; it wouldn’t feel the same if we didn’t mention them. New US levies arrived in July, while September’s Trump-Xi summit extended the trade truce without a broader breakthrough. Another problem postponed, rather than resolved.
Bottom Line
Rising bond yields can be uncomfortable, with consequences extending beyond higher government borrowing costs. However, provided governments continue to repay their debts, the maths of bond investing has shifted in investors’ favour. Higher yields offer an attractive income and a greater cushion against falling prices; it now takes a larger capital decline to outweigh that income and produce a loss, although that remains possible.
Q&A
What’s on your mind?
What did fixed income (bonds) do in the third quarter of 2026?
The third quarter was challenging for bond investors as persistent inflation, partly driven by higher energy prices, increased expectations for interest rate rises. Government bond yields rose across many major markets, pushing prices down. Longer-dated bonds were particularly vulnerable because their prices are more sensitive to changes in yields. Bonds issued by financially stronger companies generally held up better than government bonds. Resilient economic
growth and healthy company finances helped reassure investors about companies’ ability to repay their debts, while the income available continued to attract buyers. Although markets became more unsettled at times, bonds still offer relatively attractive income compared with much of the past decade. Holding a mix of bonds from different governments and companies can also help spread investment risk. Overall, the quarter was a reminder that while higher yields can create short-term price headwinds, they also improve the long-term return potential available from fixed income investments.
What did stock markets do in the third quarter of 2026?
After another eventful few months, global shares delivered small positive returns despite the Iran conflict keeping oil prices elevated and adding to inflationary pressures. The US was among the strongest regional performers, returning mid-single digits over the quarter. Strong earnings growth from major AI and technology companies provided support, alongside a resilient US economy. UK and Japanese shares also recorded modest gains. Emerging markets fell slightly, with much of the weakness concentrated in July. A sharp sell-off in South Korean and Taiwanese technology shares weighed on returns as investors questioned high valuations and whether AI-related growth could meet expectations. Value shares, trading at relatively low prices compared with earnings or assets, outperformed growth shares, extending their lead for the year. Rising interest rates put pressure on growth companies, whose valuations depend more heavily on future profits. Financials and energy performed well, with higher rates supporting the earnings outlook for some banks and higher oil prices benefiting energy companies.
What did real assets do in the third quarter of 2026?
The quarter was mixed for real assets, including commodities, infrastructure and property. Middle East tensions supported energy prices, with concerns over supply disruption pushing Brent crude oil above $100 a barrel. Precious metals, including gold, performed well earlier in the quarter but came under pressure in September. Higher bond yields and expectations of further US interest rate rises increased the appeal of income-paying investments relative to gold, which pays no income. Infrastructure companies faced both opportunities and challenges. Expanding data centres and growing electricity demand continued to support investment in power generation and networks. However, higher bond yields made the stable income these companies offer relatively less attractive, weighing on share prices. Infrastructure lagged the wider share market despite its encouraging long-term prospects. Property also struggled as higher interest rates increased borrowing costs and put pressure on valuations. Demand remained resilient in parts of the market, particularly data centres, supported by the growth of artificial intelligence and cloud computing. However, this was insufficient to offset the broader pressures on the sector.