The residual stress distribution in polycrystalline ceramics with thermal expansion anisotropy and misfitting intragranular dispersion is studied through micromechanical simulation. The effective grain boundary strength under remote tension is derived from the stability of a grain-boundary microcrack with thermal elastic residual stresses. This result is then applied to the strength and fracture properties of a two-phase nanocomposite (5 vol% SiC-Al2O3). The residual stresses from misfitting dispersion increase the effective grain boundary strength of the nanocomposite from 1.5 to 5 times more than that of the single-phase polycrystal, depending on the grain size of the matrix phase. The residual stresses reduce the instability range of microcrack precursors at grain junctions and increase the initial level of driving force for critical microcrack extension. Predicted strengthening of grain boundaries leads, in turn, to the superior inert strength of unnotched nanocomposite.