High Yield Municipal
as of December 31, 2013
Fund Commentary
Early in the quarter, fixed-income markets were focused on the Federal Reserve, uncertainty over the U.S. government shutdown and the debt ceiling debate. The Fed surprised the markets in mid-September by failing to announce a tapering in its bond purchase program. With that backdrop, interest rates moved in a narrow range. In the second half of the quarter, signs of encouraging economic growth, some improvement in employment data and another surprise announcement by the Fed — that it would begin tapering its bond purchases in January 2014 — fueled a rise in interest rates.

While the municipal market was impacted by the increase in interest rates, it remained fairly range-bound as new-issue supply contracted. New-issue supply for 2013 was down by approximately 12% over the previous year. Demand was weak in the fourth quarter as municipal bond mutual funds continued to experience sharp outflows due to ongoing credit concerns and weak total returns versus other asset classes. High-yield municipals underperformed investment-grade tax-exempts as liquidity was hampered due to year end pressures.

The Fund’s return of 0.39% for the quarter outperformed the benchmark. The Fund also outperformed its high-yield municipal fund peer group based on an overweight in higher-coupon holdings, which help to cushion against price volatility, and an underweight in below-investment-grade securities. Our underweight in tobacco-related and Puerto Rico-based securities helped performance during the quarter, while an underweight in airline-backed debt limited performance.
Investor Profile

If you are an aggressive investor seeking a high level of current income that is largely free from federal income tax, you may find this Fund provides an attractive complement to a well-diversified portfolio. The Fund is best suited for long-term higher income investors willing to assume the additional risks associated with investing in high yield securities including above-average share price fluctuations. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.

  • Concentrate primarily on municipalities that issue medium (rated A and BBB) and lower-quality debt (rated BBB and below). Lower-quality debt or high-yield securities are also commonly referred to as "non-investment grade" or "junk bonds."
  • Manage to a benchmark index of 65% investment grade and 35% non-investment grade bonds.
  • Select investments on the basis of their relative value with a focus on total return.
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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 February 24 with a record date of February 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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