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Ultra-Short Fixed Income

as of 9/30/17

Fund Commentary

While the Federal Reserve (Fed) left its benchmark lending rate unchanged in the quarter, it did announce its much anticipated balance sheet normalization plan at its September meeting. Although the announcement was expected, the news is nonetheless important and will shape the fixed income landscape for years to come. Sentiment throughout the quarter was mainly negative, with geopolitical risk and domestic politics dominating headlines. With this backdrop, Treasury rates moved lower for much of the quarter until sentiment shifted in late September. Somewhat hawkish language from Fed Chair Yellen and speculation regarding potential tax reform led to a rapid rise in the implied probability of a December Fed rate hike, from roughly 20% to 70%.

The sell-off in Treasuries at the end of the quarter resulted in yields for one-year, two-year and three-year issues increasing by 6, 10 and 8 basis points (0.06%, 0.10% and 0.08%) for the period, respectively. The adverse effect on returns of rising yields was offset by a continued tightening in credit spreads for corporate issues, which saw strong demand outweigh surprisingly high supply during the quarter.

The Fund posted a total return of 0.46% for the quarter. The Fund maintained a below-benchmark stance with respect to duration and corresponding interest rate sensitivity for most of the quarter. However, as rates moved higher, we moved to a neutral duration. The Fund remains overweight credit on the view that spreads may tighten further in the coming months.

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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