High Yield Municipal Fund

High Yield Municipal

as of March 31, 2013

Interest rates rose during the first quarter in response to a number of economic indicators and government actions. Following the drama surrounding the "fiscal cliff," Congress passed a continuing resolution to implement the automatic budget cuts known as "sequestration." Signs of further U.S. economic recovery continued, including employment gains and higher home prices, although the effect of federal budget cuts is yet to be fully felt. However, concern over news from Syria, Cyprus, the eurozone and North Korea spurred volatile trading activity during the quarter.

After a steady start to the year, the municipal bond market weakened in March as investor worries regarding changes in the tax-exempt status of municipal bonds weighed on bond prices. In addition, developments regarding troubled municipalities, along with outflows from tax-exempt mutual funds, hurt performance toward the end of the quarter. High-yield municipals outperformed investment-grade tax-exempts by a wide margin, as investor demand for yield remained robust.

The Fund returned 0.88%, matching the 0.88% return of the Barclays Municipal Bond 65-35 Investment Grade/High Yield Index. Our positions in healthcare-related securities performed well after lagging during the prior quarter. The Fund’s underweight to tobacco bonds continued to negatively impact performance, as the sector delivered above-market returns. Lastly, the Fund is maintaining significant exposure to securities rated BBB, reflecting our conservative positioning versus the peer group.

If you are an aggressive investor seeking a high level of current income that is largely free from federal income tax, you may find this Fund provides an attractive complement to a well-diversified portfolio. The Fund is best suited for long-term higher income investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

Concentrate primarily on municipalities that issue medium (rated A and BBB) and lower-quality debt (rated BBB and below). Lower-quality debt or high-yield securities are also commonly referred to as "non-investment grade" or "junk bonds."
Manage to a benchmark index of 65% investment grade and 35% non-investment grade bonds.
Select investments on the basis of their relative value with a focus on total return.

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 April 24 with a record date of April 23. 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.