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High-Yield Bond Fund —
The credit cycle extends
3rd Quarter, 2016
"As we begin the fourth quarter, both the technical backdrop and the fundamental environment appear supportive of high yield valuations. "
– Shenkman Capital Management, Inc.

During the third quarter of 2016, the impact of the Federal Reserve’s (Fed’s) decision to not raise rates at its September meeting was an extension of the credit cycle. We saw the beginnings of an increase in Treasury rates during the period as longer duration securities began to underperform mid and shorter duration securities. A recovery and stabilization in energy prices led to a reopening of capital markets for Energy sector issuers and an increase in value for such companies. In this environment, the high yield bond market posted solid results for the quarter.
The Harbor High-Yield Bond Fund returned 4.52% in the third quarter of 2016, underperforming its benchmark, the BofA Merrill Lynch US Non-Distressed High Yield Index, which advanced 4.85%. Security selection and an underweight position in gas utilities detracted from relative performance, while security selection in the oil and gas industry contributed.
Shenkman Capital Management’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Industry Positioning
During the quarter, we became more comfortable with the prospects for commodity-oriented companies and increased exposure. We increased positions in oil and gas companies and metals and mining companies. In addition, we decreased exposure to long duration and BB-rated credits, which have been negatively affected by the increase in Treasury rates, and we increased the Fund’s bank loan exposure to try to take advantage of the increase in the London Interbank Offered Rate.
New Issue Activity Accelerated in September
As a result of the continued market rally, high yield bond yields and spreads decreased to the tightest levels since mid-2015. New issue activity in the high yield bond market accelerated in September as $35.2 billion in bonds came to market from 55 deals, the second-highest monthly volume thus far in 2016. Year-to-date, 338 new bonds were issued through September, totaling $233 billion, down slightly from the $250.9 billion for the same period in 2015. The leveraged loan market also experienced the second-highest monthly total thus far this year in September, as $57.3 billion in new loans were syndicated in 82 transactions. On a year-to-date basis, $291.7 billion in new loans have come to market thus far in 2016 in 444 deals, which is more than the $266.2 billion total for the same period in 2015.
Default Activity Remained Subdued
During the quarter, default activity remained subdued in the high yield bond market and ended the period near June levels and approximately in line with the long-term average for the asset class. The Energy sector and the metals and mining group accounted for most of the defaults thus far in 2016.
We Expect the High Yield Market to Remain Attractive
As we begin the fourth quarter, both the technical backdrop and the fundamental environment appear supportive of high yield valuations. Although we believe volatility may accelerate going into the U.S. election, as we approach the Fed’s next meeting, and as headlines surrounding Deutsche Bank persist, foreign investors have continued to be compelled by the attractive yield and duration characteristics of the high yield market, especially in the prevailing low and negative interest rate environment. Moreover, as year-over-year earnings expectations improve versus generally easy comparisons to last year, as oil prices stabilize, and as U.S. consumer activity and Gross Domestic Product experience slow but steady growth, we expect the high yield market to remain attractive.

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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.