as of March 31, 2014
Fund Commentary
U.S. Treasuries rebounded from a challenging 2013 to finish the quarter with solid gains. Government bonds gained traction amid weaker-than-expected economic data in early 2014. For example, U.S. nonfarm payrolls came in below expectations for the frigid months of January and February, while unemployment fell to 6.7%. Fourth-quarter Gross Domestic Product (GDP) rose 2.6% in the third revision, suggesting a slowdown from an inventory-driven third quarter. The Purchasing Managers Index (PMI) also came in below expectations, raising questions about the sustainability of economic momentum from the second half of last year. Treasuries were further boosted by a “flight-to-quality” that resulted from volatility in emerging market currencies and the conflict between Russia and Ukraine.

These factors largely benefited the performance of longer-term Treasuries. Yields on 10- and 30-year issues declined by 31 (0.31%) and 41 basis points (0.41%), respectively, while five-year Treasury yields fell just two basis points (0.02%) and two-year Treasury yields rose four basis points (0.04%). The primary cause of the flattening yield curve was that even as longer-term bonds rallied, shorter-term issues were pressured by U.S. Federal Reserve Chair Janet Yellen’s suggestion that the Federal Open Market Committee’s first interest rate hike may occur sooner than investors had expected.

The Portfolio returned 0.43% during the quarter, slightly underperforming its benchmark. The Portfolio’s positioning with respect to both the yield curve and duration had a negative effect on performance. However, our tactical exposure to select areas of the mortgage-backed securities sector helped to offset some of the impact.
Investor Profile

If you're a conservative investor who prefers the income and quality assurance offered by government securities, you may find this Fund attractive. It is best suited for investors with relatively low-risk profiles and can provide a solid-core holding for income-oriented investors of all ages.

  • Invest primarily in securities issued or guaranteed by the U.S. government or by its agencies.
  • Select high-quality securities with maturities, under normal circumstances, between one and 10 years, with risk exposure managed in an effort to achieve reasonable returns.
  • Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
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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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