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 caused by a higher-than-expected reading on June inflation. Meanwhile, strong demand for corporate bonds caused spreads to tighten.

For the quarter, the Fund posted a total return of 0.37%, versus a return of 0.07% for the benchmark. The primary positive contributor to relative performance was income generated from the Fund’s investments in corporate credits, which remain in high demand along a sufficiently steep yield curve. The floating-rate bonds in the portfolio cushioned price volatility as intended.

Investors will be monitoring the same data points as the Fed, particularly employment growth and inflation readings, for signs that the economy has recovered sufficiently for short-term rates to rise. A surprise on either front could bring back the volatility that has so far been a source of opportunity for ultra-short fixed-income investors.
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 yield more than a money market fund with potential for capital appreciation.
  • Strive to maintain a 6-18 month average maturity, under normal circumstances, with a maximum security maturity of three years.
  • 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 June 24 with a record date of June 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.

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