High Yield Fixed Income Fund

High Yield Fixed Income

as of March 31, 2013

High-yield bonds delivered positive performance during the first quarter. The year began on a positive note, thanks to strong inflows of cash into the market, but an increase in 10-year U.S. Treasury yields brought interest rate risk to the market’s attention in February. Treasury rates stabilized in March, enabling the market to close the quarter on a firm tone. Positive corporate earnings reports also provided support for high-yield bonds. The U.S. Federal Reserve’s quantitative easing actions boosted financial assets further, and helped investors to overlook the potential impact of tax increases and federal government budget cuts. Low interest rates and high valuations have resulted in historically low absolute yields for high-yield bonds, but yield spreads relative to Treasuries remain only modestly below long-term averages.

The Fund returned 3.07%, outpacing the 2.89% return of the Barclays U.S. Corporate High Yield 2% Issuer Cap Index. At a time when intermediate- and lower-quality securities outperformed, the Fund’s overweight positions in securities rated CCC, along with an underweight to BB bonds, enhanced performance. Overweights to the life insurance and consumer cyclical services sectors, along with an underweight to electric utilities, also contributed to returns. Detractors included underweight positions in metals and building materials.

We expect economic indicators, the outlook for Fed policy, and geopolitical risk to remain key drivers of high-yield performance in the months ahead. However, we believe that the high-yield market should continue to be supported by stable fundamental factors and a low default rate.

If you are an aggressive investor seeking high current income and the potential for capital appreciation for a portion of your assets, you may find this Fund provides an attractive complement to a well-diversified portfolio. It is best suited for long-term investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations.

Invest primarily in high-yielding, lower-rated corporate debt. Lower-rated debt is commonly referred to as "junk bonds."
Take steps to properly manage downside risk by maintaining a broadly diversified portfolio.
Rely on our extensive credit research capabilities in an effort to manage risk and minimize defaults.

Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' Average Duration is calculated using the modified duration formula. Other Northern fixed income funds show the option-adjusted duration. Duration is a measure of a bond fund's sensitivity to changes in interest rates.

*Distribution rate and tax-equivalent distribution rate represent the annualization of the Fund's distributions for the prior month ending on the date shown, including capital gain distributions. The 30-day SEC yield and tax-equivalent 30-day SEC yield represent the annualization of the Fund's net investment income, excluding capital gain income. The tax-equivalent distribution rate and tax-equivalent 30-day SEC yield are based on an assumed tax rate of 47.9% for Arizona, 53.7% for California and 43.4% for national municipal funds.

**Per share paid out March 25 with a record date of March 22. The amount shown represents dividends paid for net investment income and excludes distributions from capital gain income.

Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.