US High Yield 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

Despite the year-to-date sell-off, we maintain a favorable fundamental outlook for high yield. Spreads widened significantly in the second quarter and are now wider than their historical averages, while default rates remain well below their long-term averages. Though defaults may tick slightly higher from here due to inflation and a more hawkish Fed, they should stay below their historical averages for the foreseeable future, as recent refinancing activity by companies has extended upcoming maturity walls. Technical conditions remain supportive as year-to-date outflows have been met with a quiet new issue calendar. Our new issue participation has been very limited, and we continued to find better opportunities in the secondary market.

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Though our outlook for high yield remains constructive, risks remain. Inflation represents a key risk moving forward, as issuers' borrowing costs will likely increase as central banks raise rates to combat price pressures. Amid rising borrowing costs and persistent inflation, we are targeting issuers with healthy levels of capital and limited borrowing needs in the future. We are also closely monitoring issuers' ability to pass higher costs through to consumers and will favor companies that are able to do so most effectively. Lastly, given increased risks around the potential for a recession, we continue to stress-test credits for resiliency in such an environment.

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We started the year with tight spreads and average prices near par. However, the year-to-date sell-off has led to wider spreads, lower dollar prices, and has created more total return opportunities in our market. Additionally, as rates have risen year-to-date, yields are higher today than they were at the start of the year. Thus, prospects for income have improved. Our focus will continue to be on security selection driven by fundamental, bottom-up research as our primary source of alpha, as it has been for us over the long term.

Strategy

Fund Summary

Our approach is to use an independent, fundamental, bottom-up credit selection process, combined with forward-looking research to identify potential total return ideas. We have the flexibility to search across the full capital structure to uncover high-conviction ideas and access smaller, under-researched credit issuers. 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 - Kevin Loome, Portfolio Manager,

At the end of the reporting period, our duration positioning was below that of the benchmark, which had a positive impact on performance. This is primarily a function of our underweight to BB bonds, which is the highest duration segment within high yield. We believe this positioning is appropriate in today's environment given the upward move in rates year-to-date. However, we actively reduced the relative size of our underweight to BBs over the quarter.

Constructive Views Support Positioning Shift

The portfolio continues to out-spread and out-yield the benchmark, and our positioning reflects our positive view on credit fundamentals. While we maintain a positive view on the high yield market, we remain cognizant of broader market risks, including inflation, higher interest rates, and the growing probabilities around the potential for a recession.

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In terms of industry allocations, energy continues to be our largest overweight given our view that the sector offers attractive tailwinds due to elevated commodity prices and increased industrial demand. Though we have maintained our overweight position, we have begun to reduce the relative size of our overweight based on valuations and as spreads within the sector have tightened. Our largest industry underweights include health care, services, and leisure, reflecting our view that these segments provide minimum value relative to other sectors of the market.

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Credit Quality Allocations Adjusted

While we maintained a sizable underweight to BBs, we reduced the relative size of our underweight over the quarter as we found opportunities to purchase higher-quality BB rated credits at attractive dollar prices after higher-quality bonds underperformed in the first quarter amid a rates-driven sell-off. This theme was the primary driver of positioning changes throughout the quarter. In aggregate, we increased our exposure to BBs by approximately 10%.

Indicative Benchmark Data Source: ICE BofA Merrill Lynch

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.

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.

Daily performance data is based on the latest available NAV.

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

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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Constructive Views Support Positioning Shift

Risks

Typical Investor

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