Ultra-Short Fixed Income
as of March 31, 2014
Fund Commentary
From the beginning of the year through mid-March, investors in ultra-short bonds largely “clipped coupons,” with little day-to-day price volatility. However, at the press conference that followed the March 19 Federal Open Market Committee (FOMC) meeting, U.S. Federal Reserve (Fed) Chair Janet Yellen gave a real number — six months — as an answer to when the committee might entertain an increase in short-term rates following the end of the monthly bond-buying program known as quantitative easing, or QE. The easy math of adding six months to the anticipated autumn 2014 end to QE surprised investors with the notion that the Fed’s first rate hike could occur in spring 2015. This development weighed on the prices of short-term bonds, which are very sensitive to the direction of Fed policy.

The Fund produced a first-quarter total return of 0.27%, compared with the 0.08% return of the benchmark. The primary positive contribution to performance came from above-average income from the Fund’s investments in corporate bonds. However, this was slightly offset in March by the Fund’s duration positioning, as yields of two- and three-year bonds rose. The Fund’s floating-rate bond position cushioned price volatility, as intended.

The Fed’s ultimate path for short-term rate hikes will continue to be data dependent, with factors such as employment growth, capacity utilization and inflation serving as key benchmarks. While we expect yields to move directionally higher through the rest of 2014, the path will no doubt be volatile and thus a source of opportunity for ultra-short fixed-income investors.
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.

Philosophy
  • 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.

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