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Money Market Fund —
Money market returns remain low, but are expected to rise
4th Quarter, 2015
"We were pleased to see the yield for the Harbor Money Market Fund double from 10 to 20 basis points in the last month of the calendar year. "
– Fischer Francis Trees & Watts, Inc.

The Harbor Money Market Fund returned 0.03% during the fourth quarter of 2015. The Fund’s benchmark, the BofA Merrill Lynch US 3-Month Treasury Bill Index, also returned 0.03% for the quarter. In terms of market environment, after five years of record lows, short-term interest rates began to rise in the fourth quarter of 2015. Recent monetary policy tightening by the Federal Reserve boosted interest rates off the near-zero interest rate floor. Yields on money market instruments climbed with short-term Treasury bills at 20 basis points and corporate commercial paper around the 40-45 basis point range annualized.
The two year note rose above 1% while longer term rates have been more stable, resulting in a flattening of the yield curve as represented by the difference between two year and ten year Treasury note yields. The dynamic in interest rate volatility is closely tied to market expectations for a continuation in tightening of monetary policy for the coming year. The challenge facing monetary policy makers is removing excess policy accommodation without derailing recovery.
Portfolio Manager Ken O’Donnell’s comments were made in a January 13, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

U.S. Growth Outlook
The U.S. economy appears to be on firm footing, with strengthening labor markets and elevated levels of consumption. Wages and consumer price pressures, however, remain subdued, suggesting that further progress is needed to reduce slack. While economists broadly expect the growth trend to continue, we believe the economy remains susceptible to destabilizing forces; specifically, the combination of declining global growth, a slowdown in China and a strong Dollar may have negative implications for the U.S. However, it’s important to recognize that despite recent steps, monetary policy remains accommodative, and should continue to support U.S. growth in the near-term.
In terms of outlook, we expect trend U.S. real GDP growth at roughly 2% for the coming year with continued improvement in labor markets but lagging inflationary pressures. The Fed will likely proceed with monetary policy tightening by increasing the federal funds target rate throughout the year. With this backdrop, short-term U.S. Treasury notes should rise modestly with intermediate yields continuing to trade directionally with economic data.
Interest Rate Forecasts
At current yield levels, money market funds remain competitive relative to U.S. Treasury bills and other short-term government securities and are likely to become increasingly competitive relative to short-term bank deposit rates. In terms of our strategy, we were pleased to see the yield for the Harbor Money Market Fund double from 10 to 20 basis points in the last month of the calendar year. With improving returns, the relative attractiveness of money market funds should continue to draw interest from investors. Money market yields should continue to closely track expectations for policy tightening as the year progresses, resulting in improved absolute returns for money market funds in the coming year.
Inflation Expectations
Inflation remains the key risk to our outlook, as softening inflation data could slow the pace of tightening by the U.S. Federal Reserve.
Portfolio Positioning
We continue to tactically manage portfolio duration as measured in average days to maturity, and are currently maintaining duration in the 35 day range, well within the statutory limit of 60 days. From a sector perspective, we maintain the conservative strategy of investing exclusively in government and agency securities, which 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

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.