as of March 31, 2014
Fund Commentary
The first quarter saw mixed global economic data, leading most major central banks to maintain accommodative monetary policies. Extreme weather was cited as U.S. data consistently disappointed. Janet Yellen took the helm as Chair of the U.S. Federal Reserve (Fed), stating her intent to keep monetary policy accommodative as the Fed pursues its goals of full employment and price stability. Inflation readings 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.

Long-term interest rates declined in the quarter on weak economic statistics, despite the Fed’s tapering of its 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 10-year U.S. Treasury yields fell 30 basis points (0.3%).

Against this backdrop, the Fund’s return of 2.28% for the quarter outperformed the benchmark. Security selection was the largest contributor to the Fund’s strong relative performance. Overweight positions in corporate bonds and commercial mortgage-backed securities, and underweight positions in mortgages and U.S. Treasuries also were significant contributors. The largest detractor from performance relative to the benchmark was the positioning of assets along the yield curve.
Investor Profile

If you're a conservative, income-oriented investor who wants higher current income than that generally offered by the U.S. Government Fund and you're willing to assume moderately more risk in exchange, you may find this Fund suitable. This Fund can also be an appropriate choice for investors who want to broaden and diversify their fixed income portfolio.

  • Invest primarily in investment-grade domestic debt obligations with an average maturity, under normal circumstances, between three and 15 years, but may own, to a limited extent, securities of foreign issuers and non-investment-grade debt.
  • 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, 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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