Money market instruments offered little or no return to liquidity investors in the fourth quarter, as the Federal Reserve kept its fed funds target rate in the 0.00% to 0.25% range. Despite rising bond market interest rates-in response to the central bank's intention to begin reducing its asset purchases as the economy strengthens-money market rates remained unchanged. To support the economic recovery, the Fed purchased $45 billion in Treasuries and $40 billion in agency mortgage-backed securities every month. Following its mid-December policy meeting, the central bank announced that it would curtail its $85 billion monthly asset purchases by $10 billion in January 2014. However, the Fed assured investors that it will keep short-term rates very low, even after the unemployment rate falls below 6.5%, as long as inflation remains contained.
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 December 31, 2013, 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%, 0.05%, and 1.56% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. 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 December 31, 2013, was 0.01%. Its seven-day simple annualized yield without waiver was −0.37%.* 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.
Low money market yields and very little difference between shorter-term and longer-term money market yields have become the new normal for our investment universe in recent years. We expect supply in the money markets to continue declining and for downward pressure on short-term interest rates to continue. Attractive long-term financing rates and various new bank regulations are factors that should restrain new issuance in 2014. With little change to our interest rate forecast, we are continuing a strategy of keeping the portfolio's weighted average maturity longer than that of our average competitor. Money market rates should not rise significantly until the Fed begins to raise short-term benchmark rates. Assuming the economy continues to strengthen in line with the Fed's projections, that may not occur until sometime in late 2015 or early 2016
We expect this low interest rate environment to continue well through 2015. In the aftermath of the October government shutdown and debt ceiling showdown, heightened vigilance about keeping ample liquidity is more important than ever. As always, our focus remains on principal stability, quality, and liquidity-especially in the current low rate environment.