Ultra-Short Fixed Income
as of December 31, 2013
Fund Commentary
At the December 18 Federal Reserve meeting, Ben Bernanke announced a tapering of monthly quantitative easing, cutting $5 billion planned January purchases of both Treasury and mortgage-backed securities. Expectations are for a measured month-to-month reduction in purchases, finishing by year-end 2014, or sooner if stronger growth forecasts materialize. The outgoing chairman re-emphasized that the Fed would hold short-term rates near zero for a considerable time after the end of quantitative easing, lowering the threshold unemployment rate to 6.5% before triggering a review of this policy. These conditions were enough for fixed-income investors to steepen the yield curve beyond one year as they took into account the effects of tapering and anticipated sustained growth in 2014 well-above 2%.

The Fund’s total return of 0.24% for the quarter outperformed the benchmark. The primary positive contributor to relative performance was income from the Fund’s investments in corporate credits. This was offset slightly in December by the Fund’s above-benchmark stance with respect to duration and corresponding interest rate sensitivity.

We anticipate the opportunity to reinvest into a steeper yield curve throughout the first quarter of 2014, as investors discount not only the timetable for the end of quantitative easing, but also the timing of an eventual Fed tightening. However, Fed policy will be governed by incoming data with respect to such measures as employment growth, capacity utilization and inflation, meaning that interest rates will likely remain somewhat volatile.
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 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.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.