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Arizona Tax-Exempt

as of 9/30/17

Fund Commentary

While keeping its benchmark rate unchanged during the quarter, the Federal Reserve (Fed) officially declared its plans to begin reducing its balance sheet in October. In addition, the Fed indicated that it expects to raise the benchmark federal funds rate one more time this year, most likely in December. Treasury yields moved slightly higher, with a continued flattening of the yield curve, as the market had largely priced in the Fed’s intentions. Tax-exempt yields moved in an uneven fashion, with front-end and longer-intermediate maturities outperforming.

For the quarter, the Fund generated a positive return of 0.81%. Year-to-date total return now stands at 4.22%. For most of the period, we kept a duration weighting shorter than the benchmark as we anticipate that interest rates will increase over the next six months. We focused on reducing exposure to over-priced parts of the Arizona yield curve, as in-state supply has been limited. We continue to favor high grade securities with defensive coupon and call structures. The Fund’s higher credit quality in comparison to its benchmark and peers remains firmly in place. At quarter end, the Fund held less than 6% of portfolio assets in A-rated securities and had no exposure to BBB-rated credits.

We will closely watch the Fed for any modification in its expected policies. In addition, we will track activity in Washington to assess the likelihood of tax reform. As always, we will look to purchase attractively priced new deals and sell into robust in-state secondary demand.

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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