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Money Market Fund —
Fund outperforms as monetary tightening returns
1st Quarter, 2017
"We believe a more active Fed has increased the value of tactical positioning in yield curve and duration, and shifted the portfolio from strategic to tactical as opportunities emerged. "
– Fischer Francis Trees & Watts, Inc.

Investor sentiment improved dramatically in the first quarter of 2017, with survey based measures indicating that a broad based rebound in global growth was underway. Fixed income markets experienced a steady rise in yields across most major economies. Deflationary concerns abated as headline inflation climbed from very low levels. Global central banks, with the exception of the U.S., began to discuss the potential for a reduction in stimulus measures for the first time in the cycle. While populist political challenges remain, the impact on markets has been less forceful than in prior years. In March, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (Fed) raised its target for short-term interest rates by 25 basis points, for the second time in three months.
U.S. treasury markets remained in a range that was established in the weeks following the U.S. election. Short-term yields closely tracked expectations for monetary policy rates, which were increased by 25 basis points in mid-February. Markets are currently pricing a 50% probability of an additional tightening measure in the second quarter. Collectively, yield changes served to flatten the curve as short-term yields climbed in excess of intermediate yields.
Against this backdrop, the Harbor Money Market Fund returned 0.13% for the first quarter of 2017. The Fund outperformed the 0.10% return of the BofA Merrill Lynch US 3-Month Treasury Bill Index after fees. Portfolio returns benefited from excess yield associated with agency discount notes. Duration and yield curve positioning modestly contributed to performance.
Comments by Fischer Francis Trees & Watts 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


Tactical Adjustments Surrounding Interest Rate Hike
Valuations in money market securities remain closely tied to monetary policy. We believe a more active Fed has increased the value of tactical positioning in yield curve and duration, and shifted the portfolio from strategic to tactical as opportunities emerged ahead of the FOMC meeting in March. Portfolio duration was shortened weeks ahead of the meeting and lengthened in the days before the meeting. This tactical positioning reduced the magnitude of the loss associated with the repricing in the front end of the yield curve.
“Measured” Expectations for Further Tightening
We believe our expectations for pace of monetary policy became more consistent with that of the FOMC as the quarter progressed. Inflation data has improved and is approaching Fed targets. External factors appear to play less of a role in the Fed’s reaction function than in the past. Recent global developments have eliminated the impediments to policy normalization. Nonetheless, we believe the pace of monetary policy tightening will likely be measured and follow a quarterly cycle.
Strong Market Sentiment Leads to More Optimism
We became more optimistic, on the margin, during the quarter in response to firmer economic data and improving market sentiment around the globe. A significant market event would be required to reverse this shift in sentiment. The global economic environment has improved, enabling the U.S. economy to successfully decouple and return to a self-sustaining growth path. We recognize that neutral policy rates are likely much lower than in the past and that U.S. trend growth has probably declined below 2.0%.

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.