U.S. Government Fund

U.S. Government

as of March 31, 2013

Similar to the past several years, the first quarter of 2013 began on a very optimistic note, and had market participants rethinking the U.S. "slow growth" scenario. Earlier-than-expected payment of the European Central Bank’s long-term financing operation by European banks, coupled with rising risk markets, pushed rates higher. Indeed, most early commentary concerned Europe moving past the crisis stage, while domestically the possibility of a reduced need for quantitative easing had the market testing the Federal Reserve’s existing timelines. Improved U.S. economic data, along with some Federal Open Market Committee (FOMC) member comments regarding fears of a potential asset bubble, added uncertainty to rates markets. Following these events, the market’s mood turned: First, the Italian elections surprised market watchers with the rise of the anti-euro/anti-austerity Five Star party. Then the small country of Cyprus saw a new toolkit being deployed by the "Troika" — i.e., the European Commission, the International Monetary Fund and the European Central Bank — and worries over possible deposit flight increased.

Estimates of Gross Domestic Product (GDP) for the first three months of this year have been revised to 3.5%, and retail sales, housing and employment statistics all came in above previous forecasts, until weakening somewhat in late March. During the period, 10-year Treasury rates rose from 1.75% to a high of 2.06%, before falling back to 1.85% at quarter end.

With a return of -0.47%, the Fund underperformed its benchmark based on yield curve positioning and duration. An overweight to mortgage-backed securities also detracted from performance.

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.

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.