The third quarter finished with robust returns for equities and fixed income despite periods of volatility along the way. The long-anticipated start of the interest-rate cutting cycle by the Federal Reserve in September along with new stimulus in China helped risk assets overcome concerns over weaker U.S. economic data. Small- and midcapitalization equities outperformed large caps, as the Russell 2000 Index returned 9.27% on the quarter, relative to 5.89% for the S&P 500 Index and 2.76% for the Nasdaq Composite Index. U.S. Treasury yields fell sharply during the quarter, and the yield curve bull-steepened, with short-end rates falling to a greater extent than longer tenors. The two-year note fell 28 basis points (bps) on the month and 111 bps on the quarter; the 10-year note fell 12 bps and 62 bps, respectively, resulting in a positive yield differential of 14 bps between the two- and 10-year notes at quarter-end. (Figure 2) Declining Treasury yields aided returns for many parts of fixed income, as the Bloomberg US Aggregate Index returned 1.34% on the month and 5.20% on the quarter.
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