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Money Market Fund —
Money market returns remained stable, susceptible to Federal Reserve’s accommodation policy
1st Quarter, 2016
"The U.S. economy appears to be on firm footing, with strengthening labor markets and elevated levels of consumption. But while wages and consumer price pressures appear to be firming, it's probably too soon to suggest that a trend has developed. "
– Fischer Francis Trees & Watts, Inc.

Short-term interest rates stabilized in the first quarter of 2016 after rising significantly at prior year end. In terms of the yield curve, December's monetary policy tightening by the U.S. Federal Reserve (the Fed) boosted short-term interest rates off the near-zero interest rate floor. Since year end, market sentiment has shifted considerably, reducing expectations for additional stages of tightening in the coming year.
Against this backdrop, the Harbor Money Market Fund returned 0.07% for the first quarter, in line with its benchmark, the BofA Merrill Lynch US 3-Month Treasury Bill Index, which also posted a return of 0.07%.
Portfolio Manager Ken O’Donnell’s comments were made in an April 11, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Growing Attractiveness of Money Market Securities
With improving returns, the relative attractiveness of money market funds should 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, and are likely to become increasingly competitive relative to short-term deposit rates. From a sector perspective, we maintained the conservative strategy of investing exclusively in government and agency securities, which we believe should provide the most value on a risk-adjusted basis.
Monetary Policy
The U.S. economy appeared to be strengthening during the period, but while economists broadly expect the trend in growth to continue, the economy could remain 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. economy. That being said, it's important to recognize that even after December's tightening, we believe the monetary policy remains accommodative and should continue to support U.S. growth. Interest rate volatility is closely tied to market expectations for monetary policy in the coming years. The challenge facing Federal Reserve chair Janet Yellen and other board members is removing excess policy accommodation without derailing the recovery.
Rate Hike Probabilities
In terms of our outlook, we expect to see U.S. real GDP growth at roughly 1.75-2% for the coming year, with continued improvement in labor markets but somewhat lagging inflationary pressures. The Fed will likely proceed cautiously by increasing the federal funds target rate one to two times in the current calendar year. But that's not necessarily consistent with the expectations of the market, which is pricing in a small probability of one hike in 2016. The market is very pessimistic relative to the expectations we are hearing from the Fed. This divergence between what markets are telling us and what policymakers are telling us has led to some challenges. We believe that the market needs to adjust its expectations to avoid a significant market adjustment in the future if the Fed were to tighten one or two more times.
Inflation Expectations
In terms of measuring inflation, we can look backwards at the consumer price index, or we can look forward at survey-based measures or market-based measures. Survey-based measures poll the community and determine what inflation expectations are. Market-based measures are closely tied to U.S. Treasury Inflation-Protected Securities (TIPS), which price in an expectation for inflation. Now, market-based measures have been forecasting very low inflation levels for most of this year. Survey-based measures have also declined a bit, and the Fed has suggested that that has to do with the decline in energy prices; specifically, the decline in gasoline. That has led many to expect inflation to remain benign. Nonetheless, there should be a tight relationship between strength in labor markets and inflation down the road. And as we've already seen unemployment dip to 5% and consistent strength in monthly job gains, ultimately we anticipate that those developments will lead to wage pressures. As wage pressures mount, we would expect that to result in higher pricing power for multiple measures and some level of an increase in realized inflation going forward.

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.