US Aggregate Bond Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

We believe that U.S. growth will slow in the near term because of the looming prospect of reduced fiscal spending, tighter financial conditions (as seen in sharply higher U.S. mortgage rates, a stronger U.S. dollar, and a weak equity market), and declining purchasing power due to high inflation, and we have already begun to see some signs that the labor market is decelerating.

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While it is still uncertain if we are headed into a recession, recession risk appears to have increased as a result of the Fed's decision to prioritize the price stability part of its mandate until it sees convincing evidence that inflation, both headline and core, is coming down. Based on historical patterns, slowing growth and tighter monetary policy would argue for at least stability in the longer end of the yield curve. However, persistent inflation volatility has challenged this view. We continue to be attracted to adding duration in intermediate maturities as policy rates move into restrictive territory later this year while growth is likely slowing and inflation becoming less intense, making it more challenging for the Fed to aggressively tighten.��

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In this environment, volatility in both Treasury rates and risk assets is likely to continue as financial conditions turn more restrictive. This volatility should continue to help generate opportunities in various sectors to buy bonds at relatively attractive valuations, and we are maintaining ample liquidity so that we can add to these opportunities as they arise. Credit spreads have widened meaningfully, but we expect to maintain a defensive investment posture until the market more fully prices in recession risk or inflation calms enough to allow the Fed to pivot to a less hawkish policy stance.

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We continue to look to earn yield in the portfolio above the benchmark and to take advantage of the pricing inefficiencies that are prevalent in fixed income markets. As always, security selection remains paramount in our investment approach. �

Strategy

Fund Summary

Our approach is based on proprietary fundamental research and relative value analysis. The investment manager seeks to add value primarily through sector allocation, duration management, and security selection. The investment process places a strong emphasis on risk management practices and portfolio diversification to manage the overall risk profile. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

30-Jun-2022 - Brian J. Brennan, Portfolio Manager,

Overall portfolio risk levels, which had been running at the low end of the longer-term range since the middle of last year, moved lower over the quarter. Although valuations for credit sectors looked more compelling after recent spread widening, we remain cautious in an environment where the Fed is tightening policy earnestly while growth is already slowing. In keeping with the portfolio's lower-risk profile, our allocation to cash for liquidity purposes increased as some credit allocations were reduced.�

Moved to Neutral Duration; Moderated Flattening Bias

We ended the quarter with a neutral duration posture following the significant drop in interest rates that occurred in late June as recession concerns moved to the forefront. In our view, slowing growth; uncomfortably high, but peaking, inflation; and Fed policy appearing to be less hawkish at the margin signaled stable or lower yields.

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We also moderated the portfolio's flattening bias as the yield curve lacked clear direction. However, we still preferred to hold more duration at the longer end of the curve, which is more responsive to the economy's growth trajectory than to the Fed's monetary policy path.

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Focused on Shorter-Maturity IG Corporates

The portfolio maintained a nominal overweight to IG corporate bonds but remained underweight on a risk-weighted basis. Our holdings within the sector are focused on shorter maturities, helping to dampen the impact of credit spread volatility.

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Reduced Emerging Market Exposure

We reduced our small positions in emerging market (EM) corporate bonds. In the investment-grade space where the portfolio focuses, many EM corporate bonds looked richly valued relative to U.S. corporates. We are always mindful that liquidity for EM credit can be ephemeral, particularly during periods of market stress. Additionally, we pared our exposure to EM sovereign and quasi-sovereign debt as we eliminated positions in South Africa, Chile, and Peru.

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Lowered Target Allocations to Non-Agency RMBS, CMBS

Near period-end, we lowered our target allocations for non-agency RMBS and CMBS after our securitized team downgraded its conviction in the asset class to neutral. While valuations across securitized sectors have cheapened and fundamentals are generally strong, there appear to be few near-term catalysts that could propel spreads tighter. In anticipation of a bumpy second half of the year, a general theme in the portfolio's securitized credit positioning has been to trim more volatile positions with greater spread duration while looking to swap into or hold onto lower-duration bonds that offer high carry and lower spread risk.

Team

Stephen Bartolini,
Portfolio Manager

Steve Bartolini is a portfolio manager in the Fixed Income Division at T. Rowe Price. Mr. Bartolini is the lead portfolio manager of the U.S. Core Bond Strategy, the U.S. Inflation Protected Strategy, and the U.S. Short-Term Inflation Focused Bond Strategy.

Portfolio Manager since

2022

Years at T. Rowe Price

Years investment experience

Jeff DeVack,
Portfolio Specialist

Jeff DeVack is a portfolio specialist in the Fixed Income Division of T. Rowe Price.

Years at T. Rowe Price

Years investment experience

Benchmark Data Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

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Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.

Moved to Neutral Duration; Moderated Flattening Bias

Risks

Typical Investor

Commentary for