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High Yield Municipal

as of 12/31/17

Fund Commentary

Global economic growth continued in the fourth quarter of 2017 as companies posted improved earnings results. Inflation and inflation expectations remained subdued despite improved economic growth. The Federal Reserve as expected raised interest rates in December and started its balance sheet reduction. As a consequence, the U.S. Treasury yield curve flattened.

After a relatively benign beginning of the quarter, the municipal bond market was roiled by tax reform legislation. The tax-exempt status of municipal bond income was retained but in 2018 the tax exemption for advance refunding debt will be eliminated. This led new issue supply to increase substantially, breaking records for the highest issuance ever in December at $64 billion. High yield municipals outperformed investment grade municipals during the period as the demand for yield continued to be elevated.

The Fund returned 1.45% for the quarter, outperforming the 1.13% return of the benchmark. The Fund benefited from the positive performance of the healthcare, student housing and transportation sectors. Performance was affected by the flattening of the yield curve as the Fund's weighting in prerefunded bonds increased during the quarter as issuers advance refunded a number of fund holdings. Also affecting performance negatively was the Fund's underweight to lower quality high yield general obligation bonds as State of Illinois, Chicago, and Chicago Board of Education debt rallied significantly. A lack of exposure to Puerto Rico credits was also a performance enhancer.

Holdings are subject to change and current and future portfolio holdings are subject to risk.

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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