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Bond Fund —
Variety of strategies boosted Harbor Bond Fund performance in weak market
1st Quarter, 2013
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"We believe the investment grade credit markets are pretty much fully valued and there is little opportunity left there. "
– PIMCO Investment Strategy Group

Returns of investment grade bonds slipped into negative territory in the first quarter of 2013. The broad taxable U.S. bond market, as measured by the Barclays Capital U.S. Aggregate Bond Index, returned a negative -0.13% for the three months ended March 31.
The Harbor Bond Fund outpaced the index with a positive return of 0.67% for the quarter. The Fund also outperformed the benchmark for the 12-month, 5-year, and 10-year periods ended March 31. Bill Gross, a managing director of Pacific Investment Management Company (PIMCO), has managed the Fund since its inception in 1987.
A number of strategies contributed to the Fund's performance relative to the Barclays benchmark, the PIMCO team reports. These included a shorter than index duration among U.S. securities; this helped performance as yields rose, since bond yields and prices move in opposite directions. Investments in non-agency mortgage-backed securities, corporate debt in the Financials sector, and Build America Bonds also boosted returns. An overall underweighted allocation to the corporate sector detracted from performance as credit spreads tightened over the quarter.
Looking ahead, PIMCO expects modest global growth with relatively mild inflation in the months ahead. Emerging markets should continue to be the primary driver of global growth, in PIMCO's view, as high debt levels continue to weigh on developed economies.
PIMCO's comments were made in an April 12, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Impact of housing
We believe that a large part of the potential in U.S. economic growth is coming from the housing segment in two different ways. Number one is the direct impact from the spending and construction and all the related industries. The second is the indirect effect from the wealth accumulation of individuals, which typically should support additional consumer activity. However, we believe that the wealth effect is going to be muted this time by the fact that many households continue to be underwater in their mortgages.
EM growth
We believe China will grow about 7% to 7.5% over the 9 to 12 months and most of the other countries in the emerging markets will grow between 3.5% to 4%. If you look across the regions, emerging markets should continue to be the driving engine of overall economic growth in the world.
Inflationary pressures
In the Bond Fund, we are slightly underweight on U.S. duration with the belief that, especially on the long end of the yield curve, central bank activity may begin to translate into inflationary pressures. Therefore we are avoiding the long end of the U.S. curve and purchasing some of the other countries like Canada, Brazil, and Mexico, where we think the existing level of debt as well as economic conditions within those countries are more favorable for investors.
Cautious on corporates
We are underweight in the investment grade corporate sector. We believe the investment grade credit markets are pretty much fully valued and there is little opportunity left there. Within the sector we are primarily holding Financials names, which we believe still provide the most attractive amount of value for investors. We are continuing to migrate toward very select names and also up in the capital structure to protect against potential downside moves in the near-term.
Attractive yields
We think mortgage markets are beginning to be pretty much fully valued, so we are close to being neutral on mortgages for the most part. The only exception is the non-agency market, which we believe is one of the few areas where you are still getting secured credit at a very attractive yield level.

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.