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Bond Fund —
Bonds advanced in the first quarter of 2016
1st Quarter, 2016
"While global recession fears hit markets early in the year, sentiment improved more broadly on central bank actions and higher oil prices. "
– Pacific Investment Management Company LLC

Investment grade bonds gained during the first quarter of 2016, with the Barclays U.S. Aggregate Bond Index ending at 3.03%. Below investment grade bonds, as measured by the BofA Merrill Lynch US Non-Distressed High Yield Index, trailed their investment grade counterparts slightly, generating a quarterly return of 2.80%.
The Harbor Bond Fund returned 2.05% during the quarter, underperforming its benchmark, the Barclays U.S. Aggregate Bond Index. Detractors from relative performance in the first quarter included U.S. interest rate strategies, a short position at the front of the U.K. yield curve, an allocation to non-agency mortgage-backed securities and exposure to local rates in Mexico. The Manager’s interest rate exposure to the eurozone and exposure to U.S. Treasury Inflation-Protected Securities (TIPS), which rose alongside a rally in global crude oil prices, was positive for performance. Within the investment grade corporate bond sector, favorable security selection also provided a relative boost.
PIMCO’s comments were made in an April 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights


Economic Backdrop
While global recession fears hit markets early in the year, sentiment improved more broadly on central bank actions and higher oil prices. Despite the elevated market volatility, U.S. fundamentals improved over the quarter as economic data surprised to the upside. We saw continued signs of labor market strengths as well as higher core inflation. However, concerns about global influences and financial conditions kept the Fed on hold at its March meeting. U.S. Treasury yields, as most global government yields, fell during the quarter. In Europe, additional easing by the European Central Bank (ECB) boosted riskier asset classes even as the Euro appreciated, while in Japan, the Bank of Japan’s (BOJ’s) move into negative rates contributed to market volatility. However, subsequent clarity about current policies, alongside actions from other central banks including the Fed and ECB, helped stabilize markets.
Currency Positioning
In terms of currency positioning, we have moderated our long U.S. Dollar positioning. We began the quarter with an 8% long U.S. Dollar position and ended the quarter at 4.5%. We continue to expect divergence of central bank policy between the Fed and other central bankers, such as the BOJ and ECB. So we continue to express a long Dollar position against the Euro and also against the Yen. But we’ve moderated these positions, because we don’t expect that we’ll see moves as large going forward. But we do see the U.S. Dollar gradually appreciating.
Outlook: The Three C’s
The largest sources of volatility in the first quarter of 2016 were three C’s: China, central banks and commodities. We expect that, going forward, we’ll have calmer seas. In other words, each one of these sources of volatility may be much less impactful in the next 12 to 18 months. We don’t expect China to devalue against the United States, although significantly, they may continue to let the currency flow. However, we believe there should not be a risk of a large devaluation, which could be disruptive. We expect central banks, overall, to coordinate policies in order to create a more easing environment in monetary policy. One of the reflections here in the United States, obviously of that, is the delay in raising rates. That, in and of itself, is a form of easing. Lastly, we expect commodities to find their footing as the oil markets continue to stabilize. We expect a recovery for oil prices in the next 12 months, but obviously, it’s hard to make a forecast with certainty, given that it’s driven not only by the supply factors, but also by the demand side of the equation.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting www.harborfunds.com.

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

This information should not be considered as a recommendation to purchase or sell a particular security and the holdings or sectors mentioned may change at any time and may not represent current or future investments.