as of March 31, 2014
Fund Commentary
Global economic data in the first quarter was mixed and major central banks kept monetary policy accommodative. Extreme weather was cited as U.S. data consistently disappointed. Janet Yellen took the helm as Chair of the U.S. Federal Reserve, stating her intent to keep monetary policy accommodative in pursuit of full employment and price stability. Inflation figures were benign in the quarter, with readings for the Personal Consumption Expenditures (PCE) Index, the Fed’s preferred measure of inflation, well below the desired 2% target.

Weak economic numbers drove long-term interest rates lower in the quarter, despite a tapering in the Fed’s asset purchase program. In the investment-grade corporate bond market, issuers took advantage of tight credit spreads and declining interest rates as new issuance soared to an all-time first-quarter high. The flood of supply was well received by investors. Large inflows into fixed-income strategies left managers with money to be put to work. Credit spreads tightened throughout the quarter on the strong demand, even as the 10-year U.S. Treasury yield declined by 30 basis points (0.3%).

Against this backdrop, the Fund’s return of 1.89% for the quarter slightly outperformed the benchmark. The largest positive contribution to relative performance came from overweight positions in corporate bonds and commercial mortgage-backed securities, and underweights to mortgages and U.S. Treasuries. Security selection represented another significant contributor to relative performance. The largest detractor from relative return was the positioning of assets along the yield curve.
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 while eliminating your exposure to non-investment grade debt then this Fund may be right for you. It offers a diversified portfolio of bond securities primarily invested in U.S. investment-grade debt.

  • Invest primarily in domestic investment-grade debt obligations with an average maturity, under normal circumstances, between three and 15 years.
  • Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
  • Emphasize securities and types of securities (such as Treasury, agency, asset-backed, mortgage-related and corporate securities) that we believe have the potential to provide a favorable 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 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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