The Federal Reserve kept its fed funds target rate in the 0.00% to 0.25% range during the first quarter to support the economy, but it began to taper its asset purchases. In 2013, the central bank bought $85 billion in Treasuries and agency mortgage-backed securities every month to suppress longer-term rates. However, the Fed trimmed its purchases by $10 billion in January and in February; in mid-March, the central bank announced that it would buy only $55 billion in these securities per month going forward. We believe the Fed will complete the wind-down of its asset purchases by the end of 2014 and that short-term interest rate increases are likely to begin around the middle of 2015.
The Prime Reserve Fund returned 0.00% in the quarter compared with 0.00% for the Lipper Money Market Funds Average. For the 12 months ended March 31, 2014, the fund returned 0.01% versus 0.01% for the Lipper Money Market Funds Average. The fund's average annual total returns were 0.01%, 0.02%, and 1.55% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.55% as of its fiscal year ended May 31, 2013. The fund's seven-day simple annualized yield as of March 31, 2014, was 0.01%. Its seven-day simple annualized yield without waiver was −0.36%.* The fund's yield more closely reflects its current earnings than the total return.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance,
which cannot guarantee future results. Return and yield will vary.
An investment in money market funds is not insured or guaranteed by the FDIC
or any other government agency. Although the fund seeks to preserve the value
of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
*In an effort to maintain a zero or positive net yield for the fund, T. Rowe Price has voluntarily waived all or a portion of the management fee it is entitled to receive from the fund. A fee waiver has the effect of increasing the fund's net yield. The 7-day yield without waiver represents what the yield would have been if we were not waiving our management fee. This voluntary waiver is in addition to any contractual expense ratio limitation in effect for the fund and may be amended or terminated at any time without prior notice. Please see the prospectus for more details.
The supply/demand imbalance in the money market continues to pressure rates lower. The low interest rates of the past few years have encouraged issuers to borrow in longer maturities to lock in favorable financing costs. In the municipal market, for example, we have seen many cases where issuers refinance variable rate demand notes with 10-year, 20-year, and even 30-year issues. This trend has resulted in a reduction of overall available supply of securities with very short maturities. Meanwhile, money market assets over the last year have remained somewhat stagnant, resulting in too much demand chasing too little supply. Given our outlook for the Fed to keep short-term rates low until at least 2015, we are comfortable continuing to invest in longer-term money market securities.
As the Federal Reserve's unprecedented accommodative monetary policy enters its sixth year, its zero interest rate policy continues to hurt money market fund returns the most. Though the Fed has started winding down its monthly asset purchase program, money market rates remain immune to the policy change, which could affect longer-term interest rates. As always, we remain committed to managing a high-quality, diversified portfolio focused on liquidity and stability of principal.