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Money Market Fund —
Money market returns continue to remain low, but are expected to rise in anticipation of Fed rate increase
2nd Quarter, 2015
"At current yield levels, money market funds remain competitive relative to U.S. Treasury Bills and other short term government securities. "
– Fischer Francis Trees & Watts, Inc.

The Harbor Money Market Fund returned 0.02% during the second quarter of 2015. As a reference, the portfolio exceeded the return of the BofA Merrill Lynch US 3-Month Treasury Bill Index after fees. Short-term interest rates remained low during the quarter, and yields on money market instruments continue to trade within a very tight range with short-term U.S. Treasury Bill yields in the single digits and corporate commercial paper around 20 basis points annualized.
Longer term interest rates rose during the second quarter, resulting in a steepening of the yield curve. With expectations of a tightening monetary policy later this year, one- and two-year note yields also rose. The money market curve is expected to steepen in the third quarter as market anticipation builds ahead of an increase in the Fed Funds rate which would likely result in higher returns for money market funds later this year.
The U.S. economy appears to be on firmer footing with a steady recovery in the labor sector; thus, economists generally expect growth to resume or even exceed the current trend for the rest of the year. However, factors such as challenges in Europe and the strength of the Dollar could have negative implications for the U.S. Current monetary policy remains accommodative and should continue to support near-term U.S. growth. Going forward, policy makers face the challenge of removing excess policy accommodation without derailing the recovery.
Ken O’Donnell’s comments were made in a written manager quarterly review. Highlights adapted from the commentary appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights


Outlook
Despite unexciting returns, we believe money markets remain a safe haven and continue to draw interest from investors. At current yield levels, money market funds remain competitive relative to U.S. Treasury Bills and other short term government securities.
Interest Rate Forecasts
We expect above trend U.S. Real GDP growth at roughly 3.0% for the remainder of the year and continued improvement in the labor markets. The Fed will likely respond to the improving trend by increasing the Federal Funds target rate later this year. With this backdrop, short-term U.S. Treasury note yields should rise modestly with intermediate yields continuing to trade directionally with economic data.
Inflation Expectations
Inflation remains the key risk to our outlook, as softening in inflation data could lengthen the current stance on policy accommodation, further depressing yields in the belly of the yield curve.
Duration Management
We continue to tactically manage portfolio duration, as measured in average days to maturity and are currently maintaining duration in the 40 day range, well within the statutory limit of 60 days. From a sector perspective, we maintained the conservative strategy of investing exclusively in government and agency securities, which we think provide the most value on a risk adjusted basis.

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.