During the third quarter of 2025, the global economy presented an unusual scenario where robust economic growth persisted, contrary to expectations fueled by a decelerating job market. This period was characterized by a significant upward revision in the U.S. second-quarter real GDP growth, ultimately settling at an impressive 3.8% annually. This figure significantly surpassed initial forecasts, highlighting a strong underlying resilience within the economy even as employment indicators suggested a potential slowdown. This unexpected economic vigor, coupled with moderating employment trends, eventually led the Federal Reserve to implement its first interest rate reduction for 2025, signaling the commencement of an anticipated easing cycle by market participants. Consequently, Treasury yields experienced a downward shift, with the 2-year yield decreasing by 11 basis points to 3.61% and the 10-year yield dropping by 8 basis points to 4.15%. However, amidst this dynamic macroeconomic environment, the Northern Funds Limited Term U.S. Government Fund (NSIUX) faced challenges, underperforming its benchmark. The primary factors contributing to this underperformance were identified as management fees and slight negative impacts from its exposure to U.S. Agencies, although positive contributions from U.S. Mortgage-Backed Securities provided some offset.
The third quarter of 2025 unveiled a macroeconomic landscape that diverged notably from prevalent predictions. Economic expansion showed remarkable fortitude, with the U.S. real GDP growth for the second quarter ultimately finalized at an annualized rate of 3.8%. This substantial revision upwards from preliminary estimates underscored a vibrant economy that continued to defy forecasts of a deceleration, even in the face of unmistakable signs of a cooling labor market. The labor sector, while showing moderation, prompted a pivotal policy shift from the U.S. Federal Reserve. For the first time in 2025, the Fed initiated a rate cut, a move widely interpreted by financial markets as the onset of a new easing cycle designed to support continued economic stability. This policy action reverberated through the bond markets, leading to a noticeable decline in Treasury yields across various durations. Specifically, the yield on 2-year Treasury notes decreased by 11 basis points, settling at 3.61%, while the 10-year Treasury yield also fell by 8 basis points, reaching 4.15%.
Despite the generally favorable backdrop for fixed income instruments, the Northern Funds Limited Term U.S. Government Fund (NSIUX) did not meet its performance objectives relative to its benchmark during this period. The fund's underperformance was primarily attributed to its fee structure, which created a drag on returns. Additionally, its strategic allocation to U.S. Agencies contributed marginally to the negative performance. However, not all components of the fund's portfolio faced headwinds; investments in U.S. Mortgage-Backed Securities provided a degree of positive contribution, somewhat mitigating the overall impact of the other detractors. This highlights the complex interplay of macroeconomic forces, monetary policy, and specific portfolio allocations in determining investment outcomes.
The third quarter of 2025 showcased the economy's unexpected resilience and the intricate challenges faced by investment funds. Although the labor market displayed signs of cooling, economic activity remained robust, leading the Federal Reserve to implement its first rate reduction, which subsequently influenced bond yields. Despite these broader market trends, the NSIUX fund recorded underperformance against its benchmark, largely due to fee-related factors and modest negative contributions from certain asset classes, partially offset by gains in others.