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Money Market Fund —
Fund keeps pace as rate tightening continues
2nd Quarter, 2017
"The tightening cycle has generated opportunities to tactically position the portfolio ahead of each FOMC meeting. "
– BNP Paribas Asset Management USA, Inc.

The global macro environment continued to improve in the second quarter of 2017, with several major central banks contemplating reductions in monetary stimulus. Fixed income markets trended sideways in a tight range across most major economies. Populist political challenges were averted in European elections, calming markets and paving the way for a general improvement in sentiment. Although U.K. Brexit negotiations continue to weigh on markets, deflationary concerns subsided as inflationary pressures edged higher across Europe.
In contrast, U.S. investor sentiment weakened in the second quarter in response to both softer economic data and a seemingly ineffective Trump administration. In June, 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 third time since December. Short-term yields closely tracked expectations for monetary policy rates. Markets are currently pricing in a 16% probability of an additional tightening measure in the third 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 0.20% for the second quarter of 2017. The Fund performed in line with the 0.20% return of the Fund’s index, the BofA Merrill Lynch US 3-Month Treasury Bill Index, after fees. Portfolio returns benefitted from excess yield associated with agency discount notes. Duration and yield curve positioning modestly contributed to performance.
BNP Paribas Asset Management USA, Inc.'s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Fund Returns Tick Up With Fed Moves
Absolute performance improved from the prior quarter largely in response to a tightening of monetary policy in March and again in June. Short-term yields quickly adjusted to rising policy rates with expectations for further increases, as labor data continues to support monetary policy tightening.
Tactical Adjustments Pay Off
The tightening cycle has generated opportunities to tactically position the portfolio ahead of each FOMC meeting. Markets have tended to underprice policy-tightening steps in the early stages of the cycle. Portfolio duration was lengthened in the weeks ahead of the June meeting, as markets had fully priced the move. Tactical positioning enabled the portfolio to capture the additional yield as interest rate markets repriced.
Softer U.S. Data Changes Expectations
We believe our expectations for the pace of monetary policy are consistent with the FOMC. Softer inflation data raised concerns that improvements in core Personal Consumption Expenditures (PCE) had stalled below Federal Reserve targets. Softer data, on the margin, suggests a slower pace of tightening than expected earlier in the year.
Looking Ahead with a Bit Less Optimism
Our market outlook became less optimistic, on the margin, during the current quarter in response to weaker economic data despite improving market sentiment around the globe. Volatility has declined significantly, raising fears that market events could potentially roil markets. The global economic environment has improved, reducing headwinds to U.S. economic growth, but we believe a return to 3.0% growth rates in the near term may be difficult to achieve.

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.