By David Randall

NEW YORK (Reuters) – U.S. mid-cap growth funds, emerging market stocks and inflation-protected bonds were among the winners for U.S. investors in a turbulent third quarter that saw the benchmark hit a record high only to tumble at the end of September as rising Treasury yields and debt negotiations in Washington weighed on investor sentiment.

Growth funds investing in U.S. equities beat their value-focused peers in the quarter, as a COVID-19 resurgence over the summer bolstered the case for investors to shift back into some of the big technology names that led markets during last year’s coronavirus lockdowns, reviving the so-called stay-at-home trade. This trend is now reversed, with Treasury yields rising.

Morningstar reports that the average U.S.-large-cap U.S. growth funds gained 4.6% and 0.9% respectively. The S&P 500 is on track for a 1.4% gain, after rising by nearly 8.2% in the second quarter.

Marc Zabicki (director of research at LPL Financial, NASDAQ:) stated that the general meltdown in risky assets continues and that a large part of it is driven by accommodative monetary policy.

Investors are trying to gauge how these concerns could impact U.S. stock performance throughout the year. These include the Federal Reserve’s hawkish stance that has increased Treasury yields and the collapse of China Evergrande Group, a heavily indebted Chinese property developer. There is also a potential ugly battle over the U.S. debt ceiling. The S&P 500 is on track for a 3.6% loss for the month of September.

Sebastien Galy (senior market strategist, Nordea Asset Management) stated that the global economy has been hit by a number of economic shocks. This is a period when certain segments of market prices are very high based on long-term expectations.

Morningstar reports that the Alger Mid-Cap 40 ETF, worth $37M, was the most successful among all U.S.-equities funds, with an 17.4% gain. According to Morningstar, the fund holds the largest number of holdings, including cloud company HubSpot Inc which rose 16.9% in the third quarter and Repligen Corp which saw shares rise nearly 44% during the same period.

Several Indian equities funds were the best performers in the quarter, reflecting the buoyant Sensex stock exchange index. It is currently up 24.4% due to a surge of central bank liquidity and a flurry telecommunications-focused public offerings. Zomato Ltd, a food delivery service company, saw a nearly 66% increase in market performance following its Indian IPO. Shares of the state-owned Life Insurance Corp will also debut in this year’s largest Indian initial public offering.

According to Morningstar’s most current data, the Wasatch Emerging India fund earned a 21.9% return in the third quarter. This was due to India’s hot market. Bajaj Finance Ltd is the largest holding, representing nearly 10% of assets. Its shares have increased nearly 130% in the past 12 months.

Morningstar reports that six out of 25 bond funds performed best in inflation-protected bonds. This is despite concerns that consumer price increases may continue for longer periods.

The $4.2 billion AlphaCentric Income Opportunities fund, a multi-sector fund that has approximately half its portfolio in below-investment-grade bonds, turned in the best performance among bond funds overall, with a 4% return for the quarter.

Randy Frederick, Schwab Center for Financial Research’s managing director for derivatives and trading, stated that the debt ceiling negotiations in Washington will have a major impact on stocks and bonds for the rest of the year.

Congress is yet to approve a funding measure to fund the government. Janet Yellen from Treasury has stated that the U.S. government could reach its debt limit Oct. 18. This opens the possibility for default.

Frederick believes the stock market will rally to year end if these issues can be resolved by the deadline.