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Real Return Fund —
U.S. TIPS had robust gains, faring better than other inflation-linked bonds
1st Quarter, 2016
"U.S. TIPS posted strong gains for the quarter, with returns lifted by a tightening of global financial conditions. "
– Pacific Investment Management Company LLC

Global inflation-linked bond (ILB) markets benefited from rallying rates at the beginning of the year. Support for U.S. Treasury Inflation-Protected Securities (TIPS), in particular, was driven by a market environment in which investors were seeking lower risk. However, most ILB markets trailed their nominal-bond counterparts as volatile oil prices and predominantly softer global inflation readings pressured breakeven inflation levels. The Barclays U.S. TIPS Index posted a positive return of 4.46% for the first quarter of 2016, outpacing the Barclays U.S. Aggregate Bond Index, a diversified benchmark of investment-grade bonds, which gained 3.03%. The Harbor Real Return Fund advanced 3.83% in the quarter, trailing its TIPS benchmark.
The Fund invests primarily in inflation-linked bonds issued by the U.S. and other governments. The Fund had an underweight to nominal duration over the course of the quarter, which was a detractor from performance as yields rallied. That negative impact was mitigated, however, by a positive contribution from an overweight to real rates. During the quarter, the U.S. break-even inflation curve saw substantial flattening, with short-dated inflation expectations recovering alongside oil prices. That position, overall, was positive for performance.
PIMCO’s comments were made in an April 14, 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

Additional Drivers of Performance
In terms of out-of-index exposures, the Fund had tactical holdings in intermediate- to long-end Mexican inflation-linked bonds. These bonds offer higher yield and a steep curve with roll-down potential. During the quarter, this was positive for performance, with Mexican rates rallying alongside the U.S. and other markets. The Fund also held Italian inflation-linked bonds. We also consider these bonds attractive. They offer attractive break-even inflation levels and policy support from the European Central Bank. During the course of the quarter, this was largely neutral for performance, with Italian inflation-linked bonds ending the quarter roughly flat. The underperformance in the first part of the quarter was offset by strong performance in the month of March, so performance was neutral overall.
Currency Positioning
We maintain a modest currency exposure, about 2.5%. Here, we’re long the U.S. Dollar versus short the Euro — about 0.4% against the Euro, and about 2% short versus China. During the quarter, these positions were a detractor from performance, as both the Euro and the Renminbi appreciated versus the Dollar and detracted from performance. However, we believe that the tendency will be toward a weaker Renminbi. We are not expecting any sharp moves, but we anticipate that the Chinese government will continue to let the Renminbi devalue over time.

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.