Harbor Funds | Manager Commentary

News & Commentary

View all Commentary headlines

Money Market Fund —
Low-rate environment likely to continue in 2012
4th Quarter, 2011
View as a PDF|View Fund Details
"In terms of asset classes, we are continuing the conservative strategy of investing exclusively in government and agency securities. "
– Ken O'Donnell

The fourth quarter of 2011 saw short-term interest rates hovering at near-zero levels, as the Federal Reserve maintained its strategy of monetary easing. The BofA Merrill Lynch US 3-Month Treasury Bill Index, a proxy for money market returns, registered a 0.00% return for the quarter and a 0.10% gain for the 12 months ended December 31, 2011. The Harbor Money Market Fund closely tracked the index, with returns of 0.01% for the quarter and 0.09% for the full year.
Any near-term relief for money market investors appears unlikely, in the view of Ken O'Donnell, Portfolio Manager of the Harbor Money Market Fund. He believes that monetary policy rates will remain anchored throughout 2012 against a backdrop of sluggish economic growth.
Ken O'Donnell's comments were made in a January 12, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

Interview Highlights

Low yield levels
Short-term interest rates remained at low levels throughout the fourth quarter and we are unlikely to experience a significant change in this pattern at any point in the near future. Yield levels on money market instruments have traded within a very tight range, with short-term U.S. Treasury bill yields declining through zero into negative territory for a period during the fourth quarter.
Focus on Europe
If Europe were to become further distressed, posing risks to the U.S. economy, the Federal Reserve probably would respond with another stage of quantitative easing. Some have speculated that could involve the purchase of mortgage-backed securities. They see that as an opportunity to not only take duration out of the system and provide financial support in a further accommodation but also provide specific support to the housing market. I would argue that, at least in the near term, all eyes should be on Europe.
Managing the portfolio
We have been tactically managing portfolio duration and are currently maintaining a duration near the 40-day range. In terms of asset classes, we are continuing the conservative strategy of investing exclusively in government and agency securities. We see agency discount notes as continuing to provide the most value on a risk-adjusted basis.
Inflation outlook
We haven't seen any signs of inflationary pressures in the current economy. Given a large output gap in terms of excess capacity and with labor markets at elevated unemployment levels, it seems unlikely that we will experience price pressures at the consumer level at any time in the near future.
Caution on Europe
Given the instability in Europe, the money market industry's exposure to European banks has declined significantly from only about a year ago. In general, the exposure to commercial paper has also declined since the crisis peak of 2008. We're starting to see more holdings of government paper, smaller holdings in commercial paper, and a significant decline in European exposures.

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.