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Money Market Fund —
Treasury yields continue to track monetary policy rates
3rd Quarter, 2018
"We continue to actively manage the Fund's sensitivity to rising interest rates in response to market expectations for future tightening steps by the Fed. "
– BNP Paribas Asset Management USA, Inc.

Growth stabilized in the third quarter of 2018 after the strong rebound in the second quarter. Led by the Federal Reserve, major central banks around the globe have taken early steps toward a reduction in monetary policy stimulus. The European Central Bank is nearing the end of its balance sheet asset purchases this December, while the Bank of England tightened monetary policy rates in August for the second time this cycle. In Asia, the Bank of Japan has been discussing adjustments to policy measures after adjusting the formal target range of 10-year JGB yields.
In the U.S., investor sentiment improved in the third quarter despite fears of trade wars. Benchmark U.S. 10-year yields rose above 3%, averaging 2.92% throughout the three-month period. Short-term yields continued to track monetary policy rates with expectations for tightening rising steadily in the weeks leading up to the September rate hike. Markets are currently pricing a greater than 70% probability of an additional rate hike in December.
Against this backdrop, the Harbor Money Market Fund returned 0.42% for the third quarter of 2018. The Fund underperformed the 0.49% return of its benchmark, the ICE BofAML U.S. 3-Month Treasury Bill Index, after fees. U.S. Treasury bill yields climbed as markets traced the path of monetary policy rates ahead of the September Federal Open Market Committee (FOMC) meeting. Three-month T-bills outperformed shorter maturity money market instruments during the period, which hindered the Fund’s performance relative to the longer maturity benchmark.
Comments by BNP Paribas Asset Management USA were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights

Active Duration Management Remains a Focus
Valuations in money market securities remain closely tied to monetary policy. We believe that increased activity from the Federal Reserve (Fed) has made tactical yield curve positioning and active duration management more valuable. We continue to actively manage the Fund’s sensitivity to rising interest rates in response to market expectations for future tightening steps by the Fed. Sector allocations remained relatively stable during the third quarter, with a slightly higher concentration in U.S. Treasury bills than last quarter given the yield differential versus comparable-duration agency discount notes.
Market Disruptions Provide Opportunities
Our expectations for additional Fed tightening in the 2018 calendar year increased during the third quarter. Markets are currently forecasting a strong probability for additional tightening in December, and we believe the Fed is likely to proceed at a quarterly pace of policy tightening through early 2019. The tightening cycle has historically generated opportunities to tactically position the Fund ahead of each FOMC meeting. While in our view, markets have more recently fully priced in expected policy tightening measures, external market disruptions are providing us with tactical positioning opportunities.
Increased Volatility Begets Cautious Optimism
Continued improvement in the global economic environment coupled with a decline in deflationary concerns has reduced headwinds to U.S. economic growth, in our view. The U.S. labor sector is operating at full employment with shortages beginning to appear in several segments. Wage pressures are likely to follow as a result of a labor shortage, which may result in inflationary pressures. We became marginally more optimistic during the third quarter in response to improving global market sentiment, though we remain cautious as volatility has returned amid trade discussions, raising risks of a market disruption.

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