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U.S. Treasury Index

as of 12/31/17

Fund Commentary

The Federal Reserve (Fed) raised interest rates in December for the third time in 2017, as the economy seemed to bounce back from the summer's severe tropical storms. At 1.25%-1.50%, the Fed's current target for its overnight lending rate is up from 0.50%-0.75% one year ago and held to the Fed's December 2016 forecast of three hikes for 2017. The median forecast for the fed funds rate at the end of 2018 remains 2.125%, unchanged from the September Fed meeting, which represents three more hikes in 2018. Median fed fund rate expectations for the end of 2019 held at 2.70% and the forecast for the terminal fed fund rate held at 2.875%.

During the fourth quarter, U.S. nonfarm payrolls averaged 203,667 jobs per month, up sharply from third quarter's tropical storm-impacted 91,000 and the unemployment rate fell to 4.1%. U.S economic growth was 3.2% in third quarter versus 3.1% in second quarter. Personal consumption slowed to 2.2% in third quarter, down from 3.3% in second quarter.

The Bloomberg Barclays U.S. Treasury Index returned 0.05% during the quarter. As designed, the Fund performed similarly to the Index, with a return of -0.02%. Treasury yields were mixed in the quarter as the curve continued its flattening trend. Treasury yields on the two-, five- and ten-year rose 40, 27 and 7 basis points (0.40%, 0.27% and 0.07%) respectively while 30-year yields fell 15 basis points (0.15%). We will continue to invest with the goal of providing returns that closely approximate those of the Index.

Not FDIC insured | May lose value | No bank guarantee

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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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