as of December 31, 2013
Fund Commentary
The Barclays U.S. Aggregate Bond Index produced a total return of -0.14% during the fourth quarter. Corporate bonds were the top-performing sector in the period, followed by commercial mortgage-backed securities. The Fund returned -0.19%, with the difference in returns attributable to Fund expenses. We continue to invest in a sample of securities that are representative of the Index in an effort to provide returns that closely approximate those of the Index.

Interest-rate-sensitive market segments continued to lag during the quarter, leading to underperformance for government bonds and longer-term issues. The U.S. Treasury yield curve steepened, with the yield differential between two- and 30-year maturities rising by 22 basis points (0.22%), and the difference between two- and 10-year yields climbing by 36 basis points (0.36%). Yields on two-, 10- and 30-year issues rose by six (0.06%), 42 (0.42%) and 28 basis points (0.28%), respectively, during the quarter.

Longer-term bonds remained volatile due to the prospect that the U.S. Federal Reserve would begin to reduce the extent of its bond-buying program. In December, the Fed announced that it would start trimming its monthly asset purchases by $10 billion per month — to $75 billion — in January, citing the improving job market. At the same time, the Fed made clear its intention to keep short-term rates at their current low levels for an extended period, which helped to support the performance of short-term bonds even as longer-term issues weakened.
Investor Profile

If you are a long-term, income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market, then this Fund may be right for you. It offers a diversified portfolio of bond securities approximating the Lehman Brothers U.S. Aggregate Index.

  • Passively managed in an effort to replicate the performance and composition of the Barclays U.S. Aggregate Bond Index.
  • Gain broad exposure to the U.S. Treasury, government agency, investment-grade corporate bond, mortgage- and asset-backed sectors of the fixed income markets.
  • Provide investors with a way to gain broad exposure to U.S. bond market.
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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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