Tax-Advantaged Ultra-Short Fixed Income
as of June 30, 2014
Fund Commentary
During the second quarter, the Federal Reserve (Fed) steadily reduced the size of its monthly bond purchases with little disruption to the market overall. At this pace, the program will likely be completed by year end. At the same time, Fed Chair Janet Yellen has continued to emphasize that the Fed plans to keep short-term rates low for a “considerable time” as the economy recovers.

Treasury yields held fairly steady over the quarter, with the two-year Treasury yield increasing slightly from 0.42% to 0.46%, and the three-year opening and closing at 0.87%, despite interim volatility. Meanwhile, strong demand for tax-exempt municipals against limited new-issue supply caused tax-exempt issues to rally, with two- and three-year yields tightening 11 basis points (0.11%) and 14 basis points (0.14%), respectively. As a result, municipal yields versus Treasuries fell below a 65% ratio, enhancing the value of the crossover trade into corporate bonds.

The Fund posted a 0.14% return for the quarter versus the 0.15% for the benchmark. The Fund’s current strategy continues to target a duration near one year, primarily by using fixed-rate two- and three-year municipal bonds balanced by municipal floating-rate notes. Taxable corporate bonds are also utilized when their return after taxes exceeds the return on tax-exempt municipal bonds. Taxable bonds made up approximately 30% of the portfolio at quarter end.
Investor Profile

If you're seeking an investment that may generate higher yields than money market funds with less volatility than short duration bond funds, this Fund may be appropriate for you. The Fund is intended for investors with an investment horizon of at least one year who are seeking to move a portion of their money market fund assets.

The Fund is not a money market fund, which maintains a $1.00 NAV, and the Fund's share price will fluctuate with its returns.

  • Seek to provide investors in higher tax brackets more after-tax yield than a money market fund with potential for capital appreciation.
  • Strive to maximize after-tax return by pursuing best net after-tax yield and total return opportunities in both taxable and tax-exempt securities.
  • Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years. Also manage Fund in an effort to have an average portfolio quality of A or better, with all securities to be investment grade.
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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 May 27 with a record date of May 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.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.