High Yield Municipal
as of March 31, 2014
Fund Commentary
Interest rates moved lower during the quarter as economic indicators were weaker-than-expected, in part due to the impact on economic activity of the severe weather conditions experienced in most of the United States. The U.S. Federal Reserve maintained its stance of slowly tapering the level of its bond purchases, while indicating that short-term interest rates would be kept near zero well into 2015.

The municipal market delivered strong returns during the quarter as it rebounded from its slump over the latter half of 2013. Flows into the municipal market, especially the high-yield sector, reversed course and moved into positive territory given the relative attractiveness of municipals versus other asset classes. Low new-issue volume as well as interest in distressed municipal credits such as Puerto Rico from nontraditional buyers contributed to the outperformance of high-yield municipals as compared with investment-grade tax-exempts.

The Fund’s return of 3.99% for the quarter modestly underperformed the benchmark. The Fund also underperformed its high-yield municipal fund peer group due to our overweight in higher-coupon holdings which, while cushioning price volatility during periods of rising interest rates, will underperform when interest rates decline. Our underweight in tobacco-related and Puerto Rico securities also hindered performance as more speculative high-yield issues outperformed during the quarter.
Investor Profile

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.
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Not FDIC insured | May lose value | No bank guarantee

†Northern tax-exempt fixed income funds' and Northern High Yield Fixed Income Fund's 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, 55.7% for California and 43.4% for national municipal funds.

**Per share paid out March 24 with a record date of March 21. 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.

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