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Money Market Fund —
Fourth Quarter Manager Commentary
4th Quarter, 2018
"The tightening cycle has generated opportunities to tactically position the Fund ahead of each Federal Open Market Committee (FOMC) meeting. "

Economic Overview
Global growth slowed in the fourth quarter of 2018, presenting challenges for major central banks looking to unwind recession-era monetary policy stimulus. The European Central Bank ended balance sheet asset purchases as scheduled in December, with expectations for policy rate tightening shifting to late 2019. In the U.S., investor sentiment faltered as benchmark 10-year yields breached 3%. Short-term yields continued to track monetary policy rates as expectations for tightening evaporated in the final weeks of the year. After four 25 basis point rate increases in 2018 by the U.S. Federal Reserve (Fed), markets are currently pricing a 25% probability of one additional tightening measure in 2019.
Portfolio Review
The Harbor Money Market Fund returned 0.50% during the fourth quarter of 2018, underperforming the Fund’s benchmark, the ICE BofAML U.S. 3-Month Treasury Bill Index, which returned 0.56%.
U.S. Treasury Bill yields climbed as markets traced the path of monetary policy rates ahead of the December FOMC meeting. Three-month Treasury Bills outperformed shorter maturity money market instruments during the period. The Fund’s duration was managed tactically during the quarter in response to expectations for monetary policy rate increases. Sector allocations were relatively stable with a similar concentration in U.S. Treasury Bills as last quarter.
U.S. money markets are now dominated by government funds, which has led to strong demand for U.S. Treasury bills. The supply of short-term government securities—which increased considerably following the debt ceiling extension—has now stabilized, resulting in a normalization of the T-Bill curve. Although the Fund was not impacted significantly from changes in the market environment, it did benefit from rising short-term interest rates.
The tightening cycle has generated opportunities to tactically position the Fund ahead of each FOMC meeting. Markets have, more recently, erased expectations for policy tightening steps in these late stages. Exogenous market disruptions have continued to provide tactical opportunities during this cycle.
Outlook
Our expectations for the pace of monetary policy adjustments declined during the quarter. Elevated market volatility has resulted in a tightening of financial conditions that is likely to delay future Fed tightening measures. While above-trend growth and a strong labor market should favor tighter monetary policy, the pace of future measures has likely slowed considerably. We expect the Fed to revert to tightening later this year after a brief pause in the first half of 2019, though markets are currently forecasting a terminal rate that is considerably below Fed forecasts.
Our expectations for U.S. inflation remained stable during the quarter. In our view, the Personal Consumption Expenditures Price Index, Excluding Food and Energy (Core PCE), a survey-based measure of inflation, is likely to increase marginally and remain near the Fed’s 2% target level during 2019. The U.S. Treasury Inflation-Protected Securities (TIPS) Index, a market-based measure of inflation, is currently pricing modest expectations for future inflation at roughly 1.80% for 10 years. This decline from a year ago reflects weakness in sentiment stemming from the recent spike in volatility. Benign inflationary pressures provide the Fed with significant flexibility in the face of rising uncertainty.
Market anxiety appears to stem from fading tailwinds from the federal tax cut and rising global trade tensions. Recent weakness in the global economic environment, coupled with a decline in sentiment, has increased headwinds to U.S. economic growth. While late-cycle indicators such as the U.S. labor sector remain strong, interest-sensitive sectors in the economy have exhibited weakness. We became less optimistic during the quarter in response to weaker global market sentiment. We remain cautious of volatility, anticipating that trade discussions could raise the risk of a market disruption.

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