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Money Market Fund —
Central banks weigh tightening policies as economic growth continues
3rd Quarter, 2017
"During the quarter, we became more optimistic in response to improving global market sentiment. However, we remain cautious as volatility remains very low, raising risks that a market event could potentially disrupt markets. "
– BNP Paribas Asset Management USA, Inc.

The global economic expansion continued during the third quarter with advanced economies continuing to benefit from policy accommodation. With stronger economic growth and declining unemployment, several major central banks have adopted less dovish postures while contemplating a reduction in monetary policy stimulus. In Europe, the European Central Bank is expected to announce a reduction in the pace of asset purchases starting early next year. The Bank of England has strongly hinted that an increase in interest rates will likely be warranted in the near term, in order to contain inflationary pressures that have appeared following last year's Brexit announcement. Japan remains the outlier, with the Bank of Japan continuing to apply stimulus to a fledging Japanese economy.
In the U.S., investor sentiment weakened modestly during the third quarter in response to softer inflation data and a seemingly ineffective presidential administration. Short-term yields closely tracked expectations for monetary tightening despite unchanged policy rates. The Manager believes Markets are currently pricing a 70% probability of an additional tightening measure in the fourth quarter.
Against this backdrop, the Harbor Money Market Fund returned 0.25% for the third quarter of 2017. The Fund slightly underperformed the 0.26% return of the BofA Merrill Lynch US 3-Month Treasury Bill Index after fees. Portfolio returns benefited from excess yield associated with agency discount notes. Duration and yield curve positioning modestly contributed to performance.
BNP Paribas Asset Management USA, Inc.’s comments were made in an October, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2017.

Interview Highlights

In Wake of Shift, Demand for Government Bonds Is High
The portfolio was not impacted significantly by changes in the market environment during the quarter. The shift in U.S. money markets from prime to government assets appears to have run its course. Demand for short-term government securities remains elevated and may create challenges at year end as Treasury Bill issuance declines in response to debt ceiling issues.
Our Forecast Points to Further Rate Increases, in 2017 and 2018
In our view, expectations for additional interest rate tightening during the 2017 calendar year declined considerably during the quarter, but reversed course during September. Markets are currently forecasting a strong probability for additional tightening in December. We believe the U.S. Federal Reserve (Fed) will announce an increase of 25 basis points in the target federal funds rate in December, followed by three additional tightening steps during the 2018 calendar year. We believe that progress from the Trump administration toward successfully passing tax reform would likely drive private investment and accelerate short-term growth, which could warrant more aggressive tightening in the future.
We Are Cautiously Optimistic
We believe 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. We believe wage pressures are likely to follow, with a discernable lag resulting in renewed inflationary risks. During the quarter, we became more optimistic in response to improving global market sentiment. However, we remain cautious as volatility remains very low, raising risks that a market event could potentially disrupt markets.

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