Alpha Engine Perspectives October 20, 2026 • 6 min read Extra Credit Our 3Q outlook, which includes resilient growth, sticky inflation and t

The U.S. economy is moving from expansion toward late cycle as resilient growth and sticky inflation push rates and the neutral interest rate higher.

• During the third quarter, the 10-year U.S. Treasury yield rose from 4.47% to 5.28% as investors demanded more compensation for inflation uncertainty and potentially higher Treasury supply.
• Growth remained resilient despite higher energy prices and tighter financial conditions, while investment-grade and high-yield spreads widened modestly.
• Loomis Sayles attributes persistent inflation to structural forces including fiscal deficits, demographic pressures, deglobalization, supply-chain reconfiguration, defense spending, and investment in AI, energy infrastructure, and industrial capacity.
• The firm argues that higher Treasury yields have mainly reflected rising real yields rather than deteriorating confidence in the Federal Reserve, with competition for capital from AI infrastructure, energy investment, and government borrowing reinforcing structurally higher rates.
• Its base case is above-target inflation and trend-like growth, leading the Fed to continue hiking toward 4.75%, while the proprietary Credit Health Index indicates defaults and downgrades should remain below historical averages.

Takeaway: Investors should remain flexible, selectively extend duration, preserve liquidity and favor security selection and up-in-quality carry over broad credit beta, while recognizing upside risks to rates if supply-driven inflation reaccelerates.