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Arizona Tax-Exempt

as of 12/31/17

Fund Commentary

As expected, in December the Federal Reserve (Fed) raised interest rates for a third time in 2017. This environment, along with an expanding economy and growing corporate profits, resulted in a considerable rise in short-term Treasury yields this quarter. However, with inflation contained, long-term Treasury yields actually fell during the same period. Rates in the municipal market moved in a similar manner, as the tax-exempt yield curve flattened significantly. Municipals performed impressively during December, as the market digested a record amount of monthly issuance. This supply was spurred by tax reform legislation impacting tax-exempt issuers.

The Fund returned 0.53% for the quarter and returned 4.77% for calendar year 2017. We extended duration on a real and relative basis to capture opportunities created by the significant increase in municipal supply. In terms of maturity structure, we focused on longer-intermediate maturities that offered the most attractive pickup in Arizona yield. We continue to favor defensive coupon and call structures. The Fund has maintained its higher credit quality in comparison to its benchmark and peers. At quarter end, we held just under 6% in A-rated securities and had no exposure to BBB-rated securities.

We will closely monitor the Fed for any changes in policy with a new Chairman coming on board. Specifically, we will monitor expected Arizona supply as we begin a new year. Plus, we will track demand for tax-exempt paper after changes in the tax code.

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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