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Money Market Fund —
Fourth Quarter Manager Commentary
1st Quarter, 2019
"Exogenous market disruptions continue to provide tactical opportunities during this cycle. "

Economic Overview
Global growth slowed in the fourth quarter, presenting challenges for major central banks looking to unwind recession era monetary policy stimulus measures. 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 U.S. Treasury yields tumbled along with prices of risk assets. Short-term yields declined as expectations for further tightening of monetary policy evaporated in the final weeks of the year. After reaching the lower estimates of the U.S. Federal Reserve’s neutral range in December 2018, markets are currently pricing a 25% probability of an easing in monetary policy in 2019.
Portfolio Review
In the first quarter of 2019, the Harbor Money Market Fund (Institutional Class) returned 0.53%, underperforming its benchmark, the ICE BofAML U.S. 3-Month Treasury Bill Index, which returned 0.60%.
U.S. Treasury bill yields climbed as markets traced the path of monetary policy rates ahead of the December Federal Open Market Committee (FOMC) meeting. Three-month Treasury bills outperformed shorter maturity money market instruments during the period.
An active U.S. Federal Reserve (Fed) has increased the value of tactical positioning in yield curve and duration. Portfolio duration was managed tactically during the quarter as expectations for monetary policy rate increases declined.
Sector allocations were relatively stable, with a similar concentration in U.S. Treasury bills as last quarter. U.S. money markets are dominated by government funds, which has led to strong demand for U.S. Treasury bills. Treasury yields stabilized around 2.40% as short-term policy rates appear to be on hold for the foreseeable future.
The relative yield advantage from U.S. agency discount notes has been compressed to extremely low levels as the demand for short-term government securities has risen significantly. As a result, the Fund maintains an underweight allocation to agency securities, adding to exposures on an opportunistic basis.
We became more optimistic during the quarter as markets stabilized and economic data contradicted recent negative sentiment. This is in sharp contrast to the pessimistic views that dominated market sentiment at the start of the year. We believe a reduction in global economic headwinds coupled with easing financial conditions over the last few months may support U.S. economic growth going forward. While late-cycle indicators such as the U.S. labor sector remain strong, inflationary pressures remain benign.
The U.S. Treasury Inflation-Protected Securities (TIPS) market is currently pricing modest expectations for future inflation at roughly 1.87% for 10 years. This decline from last year reflects weakness in sentiment stemming from the recent spike in volatility. While our expectations for U.S. inflation remained stable during the quarter, we believe core personal consumption expenditures will increase marginally but remain below the Fed’s 2% target level throughout the year. In our view, benign inflationary pressures provide the Fed with significant flexibility in the face of rising uncertainty.
The Fed has become increasingly data-dependent and sensitive to market developments. The recent forecasts from the FOMC were for no further rate increases in 2019. While we believe the Fed will remain on hold throughout 2019, we expect balance sheet reinvestment reductions to cease in the fourth quarter when the size of the Fed’s balance sheet reaches the optimal target level.
The tightening cycle has generated opportunities to tactically position the portfolio ahead of each FOMC meeting. Markets currently indicate that the tightening cycle has ended, and the next adjustment by the Fed will be to lower policy rates. If the Fed resumes tightening after this pause, we believe markets will need to significantly reprice expectations for higher interest rates. Additionally, exogenous market disruptions continue to provide tactical opportunities during this cycle.

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