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Bond Fund —
Optimism tempered by uncertainty in the first quarter
1st Quarter, 2017
"We believe the nearly eight year old global economic expansion could strengthen and broaden over the coming year. "
– Pacific Investment Management Company LLC

Much of the first quarter of 2017 was marked by surging optimism among U.S. businesses and consumers along with solid fundamentals that helped bolster risk appetites. However, the risk rally—spurred in part by expectations for growth enhancing policies such as fiscal stimulus, tax reform, and deregulation—moderated some as policy setbacks raised concerns about the administration’s ability to implement its pro-growth agenda.
During the first quarter, some post-election trends continued: volatility remained relatively low, equities rallied, and credit spreads tightened. Others, though, moderated or reversed: U.S. yields were generally range-bound and a weaker Dollar helped emerging market assets recover their losses from the previous quarter.
The Harbor Bond Fund returned 1.53% during the first quarter, outgaining its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 0.82%. Contributors to relative return included out-of-benchmark allocations to Treasury Inflation-Protected Securities (TIPS) and high yield bonds. An underweight allocation to investment-grade bonds weighed on relative results.
PIMCO’s comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights

Monetary Policy
Solid U.S. economic data, relatively easy financial conditions, and both business and consumer optimism gave the Federal Reserve (Fed) an opportunity to continue on its path toward policy normalization. The Fed’s March rate hike, though, was perceived as more dovish given the largely unchanged statement and "dot plot," which shows where each member of the Federal Open Market Committee thinks the federal funds rate should be at the end of each of the next few years and in the longer term. Inflation expectations were generally stable despite fluctuations in oil prices related to building inventories in the U.S. and concerns over OPEC’s adherence to its production cut agreement. The fundamental backdrop remained healthy and, relatively, unchanged. Supportive growth trends, including improving business activity indicators across developed and emerging regions, contributed to improved sentiment.
We Anticipate Further Economic Expansion
We believe the nearly eight year old global economic expansion could strengthen and broaden over the coming year, driving global gross domestic product (GDP) growth to 2.75%–3.25% from 2.6% in 2016 and boosting consumer price index (CPI) inflation to 2.25%–2.75%. Our outlook reflects several factors that we consider encouraging, including an expectation of generally supportive fiscal policies in most developed market economies and easier financial conditions since the start of the year. In the U.S., we believe GDP growth could reach 2.0%–2.5% in 2017, should business investment recover and consumer spending improve. Our forecast anticipates that core inflation could hover sideways this year at 2.0%–2.5%, but we believe it likely that the Fed could feel encouraged by above-trend growth to raise interest rates two more times during 2017, on top of the March rate hike.
International Outlook
For the eurozone, we now believe that growth could rise to a range of 1.5%–2.0% in 2017, revised higher from our forecast in December to reflect the stronger momentum into this year. While political uncertainty remains elevated ahead of crucial elections in France, Germany, and potentially Italy, both fiscal policy and monetary policy are expansionary, and the recovery in global trade growth supports exports and investment. In the U.K., we believe growth could stay in the range of 1.75%–2.25% (above market consensus) despite Brexit, reflecting robust momentum, higher government spending, and a positive contribution from net trade on the back of the 15% drop in the Pound in 2016. We believe that Japan’s fiscal stimulus and a weaker Yen could propel GDP growth there to 0.75%–1.25% in 2017, with inflation likely remaining significantly below the 2% target. In our view, China’s public sector credit bubble and private sector capital outflows will likely remain under control, and we believe growth could slow to a 6%–6.5% band in 2017 as policymakers prioritize financial stability over economic stimulus. In emerging markets, we believe moderate growth could return to Brazil and Russia.

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