Short-Intermediate U.S. Government
as of December 31, 2013
Fund Commentary
On December 18, the Federal Reserve announced that January would see the official start to a tapering in its asset purchases under quantitative easing. The result was upward pressure on longer-term interest rates that took 10-year Treasury yields back above 3.00% in the last week of 2013. Short-term rates remained more or less anchored as the yield curve resumed its steepening trend, although the middle of the curve was hit harder than the long end by rate increases.

Incoming data was also supportive of higher rates. U.S. non-farm payrolls came in above expectations despite a partial government shutdown to start the quarter that impacted government employment and delayed the release of economic data, while the unemployment rate fell to 7.0%. Third-quarter Gross Domestic Product (GDP) growth was revised upward to 4.1%, well ahead of initial estimates of 3.6%, thanks to inventory growth and a boost in consumption. U.S. stocks closed a stellar year with another strong quarter to reach all-time highs, and prices of Treasury Inflation-Protected Securities (TIPs) reflected a rise in inflation expectations.

The Fund’s total return of -0.41% modestly underperformed its benchmark during the quarter. Our overweighting of mortgage-backed securities detracted slightly from overall performance, although we reduced the overweight during the quarter. The Fund’s positioning along the yield curve and its duration and corresponding interest rate sensitivity also had a marginally negative impact on performance.
Investor Profile

If you're a conservative investor who prefers the income and quality offered by government securities, you may find this Fund attractive. It is best suited for income-oriented investors who prefer low risk.

Philosophy
  • 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 two and five 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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