ANNUAL REPORT
______________________
GNMA FUND
______________________
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to
others who have received a copy of the prospectus of the T. Rowe Price GNMA
Fund.
<PAGE>
Fellow Shareholders
Bond funds performed well during both the quarter and the 12-month period
ended May 31, despite the rise in interest rates throughout the first half of
our fiscal year. Since the last hike in the federal funds rate on February 1,
investors have switched from anticipating further rate increases to expecting a
possible easing as early as July. Yields on long-term fixed income securities
have been declining since November 1994, forecasting the long-awaited slowdown
in economic growth. MARKET ENVIRONMENT After vigorous fourth quarter growth at
an annualized rate of 5.1%, the economy slowed to 2.7% in the first quarter of
1995. In contrast to 1994, when the economy strengthened and interest rates
soared, this year the economy has lost strength and rates have fallen sharply.
The yield on 30-year Treasury bonds fell to 6.67% at the end of May from a
high of over 8% last November. Yields on maturities in the 2- to 10-year range
declined even more, with the 5-year Treasury note dropping to 6.08% from a 1994
high of 7.86%.
Falling rates have once again raised fears of increases in prepayments as
homeowners either refinance existing mortgages or trade up to new homes because
of more affordable rates. While applications for both new and refinanced
mortgages have so far been rising modestly, there is usually a lag of two to
four months between interest rate changes and mortgage prepayment activity.
However, reflecting investor expectations, mortgage securities underperformed
both Treasuries and corporates in the quarter.
[Yield Comparison chart showing current coupon GNMA and 10-year Treasury note
yields from 5/31/94 through 5/31/95]
At present, below-market coupons with prices under par represent
approximately 26% of the mortgage market, current coupons (7.5% mortgage pools
translating into 8% homeowner mortgages) about 17%, and premium coupons with
above-par prices the remaining 57% based on the Salomon Brothers 30-year
GNMAIndex. Increasing prepayments have a positive impact on the discount sector,
a slightly negative effect on the current coupon sector, and a more pronounced
negative impact on premium coupon mortgage pools. The seasoning of this last
group is critical since older pools ordinarily experience slower prepayments
than newer ones.
With mortgage rates falling more than one percentage point from their highs
of last November, we have once again entered a period of concern about
refinancing activity. The major question is how many homeowners who missed the
opportunity to refinance their mortgages at lower interest rates during the last
prepayment wave in 1993 will seize this new opportunity. The answer should be
evident in the months ahead. PERFORMANCE REVIEW Your fund turned in strong
performances during both the 3- and 12-month periods ended May 31, surpassing
the averages for its Lipper peer group. Results were particularly powerful for
the last quarter, more than making up for weak returns in the first half of the
fiscal year. Our strategy regarding ownership of various mortgage pools enabled
us to maintain the dividend distribution at $0.17 for the quarter, the same as
for the third quarter, bringing the annual total to $0.68 per share.
<PAGE>
- --------------------------------------------------------------------------------
Periods Ended 5/31/95
3 Months 12 Months
---------------------
GNMA Fund 5.15% 12.11%
Lipper GNMA Fund
Average 4.99 10.18
- --------------------------------------------------------------------------------
STRATEGY
We continued to emphasize both protection of principal and stability of
income by minimizing exposure to prepayments and interest rate risk. The fund's
seasoned higher-coupon mortgages are less sensitive to declining interest rates
than newer mortgage pools since a high portion of theprincipal was returned in
the early years. Because of their longevity, they are subject to less prepayment
risk than newer high coupon pools. Low coupon pools with their slower principal
payments rise sharply in price when interest rates decline.
This environment has led us to concentrate new purchases in lower-coupon
mortgages while simultaneously holding on to many older high-coupon mortgages
for steady dividend returns. Some of the purchases were made in the forward
market for future delivery, anticipating both favorable prices and demand for
the securities. This is the reason for the 111% GNMAposition in the portfolio.
The chart in the next column shows that the coupons of many fund holdings
dropped as we added positions in 6.5%, 7%, and 7 .5% pools.
Over the quarter we also reduced our position in Treasury securities, which
did well when rates fell early this year, since we believe that most of the bull
market may be over.
[GNMA Holdings by Coupon graph showing range of coupons from 6% to 12%]
OUTLOOK
The slowing economy and early signs of progress in reducing the size of the
federal budget deficit have provided the impetus for rising bond prices and
falling interest rates. This has prompted speculation that the Federal Reserve
might reverse course from a tighter to a less restrictive monetary policy. Lower
interest rates should help the economy regain its momentum, but growth is likely
to remain modest in the second half of 1995.
We anticipate a period of stability following the sharp decline in interest
rates so far, which would be favorable for returns on mortgage securities. Fears
of a huge surge in prepayments are overblown, in our view. The major increases
in the prices of GNMAs are probably behind us, but their relatively high coupon
income should provide solid returns in the current environment.
Respectfully submitted,
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
June 16, 1995
<PAGE>
- --------------------------------------------------------------------------------
Statistical Highlights
T. Rowe Price GNMA Fund / May 31, 1995
- --------------------------------------------------------------------------------
Key Statistics
Periods Ended
Dividend Yield* 5/31/95
- --------------------------------------------------------------------------------
3 Months 7.28%
12 Months 7.76
Dividend Per Share
- ---------------------------
3 Months $0.17
12 Months 0.68
Change in Price Per Share
- ---------------------------
3 Months (From $9.21 to $9.51) $0.30
12 Months (From $9.14 to $9.51) 0.37
- --------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same period.
================================================================================
Sector Diversification
Percent of Net Assets
5/31/94 2/28/95 5/31/95
- --------------------------------------------------------------------------------
GNMA Securities 99% 105% 111%
U.S. Treasury Securities 9 6 4
Other Government
Agency Securities 1 1 1
Other Assets Less
Liabilities -9 -12 -16
================================================================================
<PAGE>
Maturity Diversification*
Percent of Net Assets
Range 5/31/94 2/28/95 5/31/95
- --------------------- ------- ------- -------
Short-Term
(0 to 1 Year) -5% -10% -14%
Short Intermediate-
Term (1+ to 5 Years) 53 7 7
Long Intermediate-
Term (5+ to 10 Years) 35 54 66
Long-Term
(over 10 Years) 17 49 41
Weighted Average
Maturity (Years) 6.3 9.1 8.9
Weighted Average Effective
Duration (Years) 4.4 5.6 4.9
- --------------------------------------------------------------------------------
* Based on prepayment-adjusted life of GNMA securities.
================================================================================
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 5/31/94 2/28/95 5/31/95
- ----------------------- ------- ------- -------
1 100% 100% 100%
2 - - -
3 - - -
4 - - -
Weighted Average Quality 1.0 1.0 1.0 *On a scale of 1 to 10, with Grade 1
representing highest quality.
================================================================================
- --------------------------------------------------------------------------------
Average Annual Compound Total Returns
Periods ended May 31, 1995
1 Year 5 Years Since Inception 11/26/85
------- ------- --------------------
12.11% 8.89% 8.32%
================================================================================
Note: For the above periods ended 3/31/95, the fund's returns were 6.37%, 8.34%,
and 7.96%, respectively. Income return and principal value represent past
performance and will vary. Shares may be worth more or less at redemption than
at original purchase.
- --------------------------------------------------------------------------------
<PAGE>
Investment Record
T. Rowe Price GNMA Fund
The table below shows the investment record of one share of the T. Rowe
Price GNMA Fund, purchased at the initial offering price of $10.00. Over this
time, interest rates have been volatile. The results shown should not be
considered a representation of the dividend income or capital gain or loss which
may be realized from an investment made in the fund today.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital With With Dividends
Fiscal Net Asset Income Gain Dividends and Capital Total
Year Ended Value Dividends Distributions2 Reinvested Gains Reinvested2 Return
---------- -------- -------- ----------- ---------- --------------- --------
2/28/861 $10.12 $0.26 $10.39 $10.39 3.89%
1987 10.27 0.90 11.51 11.51 10.82
1988 9.55 0.92 $0.02 11.78 11.80 2.49
1989 8.93 0.90 12.14 12.16 3.06
1990 9.16 0.85 13.64 13.67 12.41
1991 9.47 0.83 15.42 15.45 13.02
1992 9.79 0.80 17.31 17.35 12.28
1993 9.92 0.75 18.93 18.97 9.36
1994 9.60 0.68 19.63 19.67 3.71
5/31/943 9.14 0.17 19.04 19.08 -3.03
1995 9.51 0.68 21.35 21.39 12.11
Total $7.74 $0.02
<FN>
1 From inception 11/26/85 to 2/28/86.
2 Includes long-term capital gain of $0.02 on 3/31/87.
3 Fiscal year-end changed from February 28 to May 31; figures are for
three months from 3/1/94 to 5/31/94.
</FN>
</TABLE>
============================================================================
<PAGE>
Statement of Net Assets
T. Rowe Price GNMA Fund / May 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
U.S. Government Guaranteed Obligations -- 115.7%
Amount Value
----------- -----------
U.S. Government Mortgage-Backed Securities -- 112.0%
Federal Housing Authority, 9.95%, 10/1/32 .............................. $ 4,985 $ 5,159
Government National Mortgage Assn., I, 6.00%, 9/15/23 .................. 10,000 9,319
6.50%, 6/15/23 - 1/15/24 .......................................... 66,054 63,415
7.00%, 4/15/17 - 7/15/20 .......................................... 144,246 142,085
7.50%, 3/15/07 - 7/15/20 .......................................... 121,847 123,520
8.00%, 11/15/12 - 7/15/20 ......................................... 143,171 148,426
8.50%, 12/15/04 - 7/15/20 ......................................... 60,419 63,440
9.00%, 4/15/16 - 9/15/24 .......................................... 84,243 89,166
9.50%, 6/15/09 - 5/15/25 .......................................... 61,088 64,635
10.00%, 10/15/15 - 7/15/24 ........................................ 14,028 15,287
10.50%, 1/15/13 - 11/15/21 ........................................ 7,3228,024
11.00%, 2/15/10 - 6/15/19 ......................................... 1,5611,728
11.50%, 4/15/10 - 7/15/20 ......................................... 6,8387,633
12.00%, 5/15/11 - 10/15/15 ........................................ 8,6079,694
12.50%, 4/15/10 - 7/15/15 ......................................... 3,3503,796
13.00%, 1/15/11 - 8/15/15 ......................................... 1,5161,714
13.50%, 5/15/10 - 2/15/15 ......................................... 2,2102,502
II, 8.00%, 10/20/24 .................................................. 3,8463,914
8.50%, 4/20/16 - 2/20/23 .......................................... 31,429 32,449
10.00%, 9/20/16 - 4/20/25 ......................................... 5,0115,337
11.00%, 2/20/14 - 9/20/20 ......................................... 3,5233,812
11.50%, 12/20/13 - 7/20/20 ........................................ 2,1782,376
12.50%, 10/20/13 - 1/20/16 ........................................ 270 299
13.00%, 10/20/13 - 9/20/15 ........................................ 1,2551,386
GPM, I, 8.75%, 6/15/17 - 6/15/22 ..................................... 1,6841,739
9.00%, 5/15/09 - 3/15/14 ......................................... 831 860
9.25%, 5/15/16 - 8/15/21 ......................................... 8,9759,286
9.50%, 6/15 - 11/15/09 .............................................. 3,2833,465
9.75%, 4/15/16 - 9/15/21 ......................................... 12,085 12,749
10.75%, 2/15/16 - 6/15/19 ........................................ 2,5362,758
11.00%, 8/15 - 9/15/10 ........................................... 497 545
12.00%, 10/15/10 - 2/15/13 ....................................... 735 815
12.25%, 9/15/13 - 5/15/15 ........................................ 572 637
12.50%, 4/15/10 - 10/15/12 ....................................... 846 943
12.75%, 10/15/13 - 5/15/15 ....................................... 594 658
II, 9.75%, 12/20/20 - 7/20/21 ...................................... 618 647
10.25%, 3/20 - 9/20/16 ........................................... 46 50
11.00%, 9/20/13 - 1/20/14 ......................................... 158 172
12.25%, 1/20/14 - 12/20/15 ........................................ 468 518
12.75%, 10/20/13 - 7/20/15 ........................................ 469 516
Project Loan, 9.25%, 2/15/97 - 10/15/23 .............................. 10,286 10,783
10.00%, 2/15/30 .................................................. 10,906 11,725
10.75%, 3/15/26 .................................................. 6,1646,693
REMIC, 6.50%, 10/16/24 ............................................... $ 33,000 $
29,865
Interest Only, 8.00%, 6/16/23 ** ................................... 17,767 3,520
908,060
U.S. Government Obligations -- 3.7%
U.S. Treasury Bonds, 7.50%, 11/15/24 ................................... 15,000 16,498
U.S. Treasury Notes, 7.50%, 2/29/96 .................................... 13,375 13,525
30,023
TOTAL INVESTMENTS IN SECURITIES -- 115.7% OF NET ASSETS (COST $912,846) 938,083
Payable for Investments Purchased ...................................... (136,667)
Other Assets Less Liabilities .......................................... 9,051
---------
NET ASSETS CONSIST OF: ................................................. Value
---------
Accumulated net investment income - net of distributions ............... (4,774)
Accumulated net realized gain/loss - net of distributions .............. (33,504)
Net unrealized gain (loss) ............................................. 25,237
Paid-in-capital applicable to 85,261,647 no par value shares of
beneficial interest outstanding; unlimited number of shares authorized 823,508
---------
NET ASSETS ............................................................. $ 810,467
---------
---------
NET ASSET VALUE PER SHARE .............................................. $ 9.51
---------
---------
<FN>
** For Interest only securities, amount represents notional principal,
on which the fund receives interest.
GPM - Graduated Payment Mortgage
REMIC - Real Estate Mortgage Investment Conduit
</FN>
</TABLE>
<PAGE>
Statement of Operations
T. Rowe Price GNMA Fund / Year Ended May 31, 1995#
(IN THOUSANDS)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income ................................................ $ 64,368
Expenses
Investment management ........................................ 3,835
Shareholder servicing ........................................ 1,414
Custody and accounting ....................................... 447
Prospectus and shareholder reports ........................... 83
Registration ................................................. 49
Proxy and annual meeting ..................................... 47
Legal and audit .............................................. 38
Trustees ..................................................... 16
Miscellaneous ................................................ 18
Total expenses ............................................... 5,947
Net investment income .......................................... 58,421
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on:
Securities ................................................... (6,415)
Futures ...................................................... (577)
Net realized gain (loss) ..................................... (6,992)
Change in net unrealized gain or loss on securities ............ 37,254
--------
Net realized and unrealized gain (loss) ........................ 30,262
--------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .............. $ 88,683
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
Statement of Changes in Net Assets
T. Rowe Price GNMA Fund#
(IN THOUSANDS)
<S> <C> <C> <C>
Three
Year Ended Months Ended Year Ended
May 31,1995 May 31,1994 Feb. 28,1994
------------ ------------ -----------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income ........................... $ 58,421 $ 15,120 $ 64,345
Net realized gain (loss) ........................ (6,992) (15,465) 2,925
Change in net unrealized gain or loss ........... 37,254 (26,398) (32,931)
---------- ---------- ----------
Increase (decrease) in net assets from operations 88,683 (26,743) 34,339
---------- ---------- ----------
Distributions to shareholders
Net investment income ........................... (56,700) (15,111) (64,288)
Tax return of capital ........................... (1,712) -- --
---------- ---------- ----------
Decrease in net assets from distributions ....... (58,412) (15,111) (64,288)
---------- ---------- ----------
Capital share transactions*
Shares sold ..................................... 125,225 40,427 274,783
Distributions reinvested ........................ 45,242 11,990 55,910
Shares redeemed ................................. (192,575) (91,650) (331,125)
---------- ---------- ----------
Increase (decrease) in net assets from
capital share transactions .................... (22,108) (39,233) (432)
---------- ---------- ----------
Increase (decrease) in net assets ................. 8,163 (81,087) (30,381)
NET ASSETS
Beginning of period ............................... 802,304 883,391 913,772
---------- ---------- ----------
End of period ..................................... $ 810,467 $ 802,304 $883,391
========== ========== ==========
* Share information
Shares sold ..................................... 13,818 4,344 27,861
Distributions reinvested ........................ 4,981 1,299 5,689
Shares redeemed ................................. (21,307) (9,853) (33,688)
---------- ---------- ----------
Increase (decrease) in shares outstanding ....... (2,508) (4,210) (138)
========== ========== ==========
</TABLE>
The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
T. Rowe Price GNMA Fund / May 31, 1995#
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price GNMA Fund (the fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company. A)
Valuation - Debt securities are generally traded in the over-the-counter market.
Investments in securities with remaining maturities of one year or more are
stated at fair value as furnished by dealers who make markets in such securities
or by an independent pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices quoted by
dealers who make markets in such securities. Securities with remaining
maturities of less than one year are stated at fair value, which is determined
by using a matrix system that establishes a value for each security based on
money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Trustees. B) Premiums and Discounts - Except
for mortgage-backed securities, premiums and discounts on debt securities are
amortized for both financial and tax reporting purposes. In accordance with
federal income tax regulations, market discounts and premiums on mortgage-backed
securities are included in the gain or loss recorded upon principal repayment of
the security for financial reporting purposes and ordinary income for tax
purposes. C) Other - Income and expenses are recorded on the accrual basis.
Investment transactions are accounted for on the trade date. Realized gains and
losses are reported on an identified cost basis. Distributions to shareholders
are recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks and enhance performance. The
investment objective, policies, program, risk factors, and following practices
of the fund are described more fully in the fund's Prospectus and Statement of
Additional Information. A) Securities Lending - To earn additional income, the
fund lends its securities to approved brokers. At May 31, 1995, the market value
of securities on loan was $15,174,000, for which the fund was fully
collateralized by cash. Although the risk is mitigated by the collateral, the
fund could experience a delay in recovering its securities and a possible loss
of income or value if the borrower fails to return them. B) Other - Purchases
and sales of U.S. Government securities, other than short-term securities,
aggregated $1,084,995,000 and $1,037,148,000, respectively, for the year ended
May 31, 1995.
<PAGE>
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income. The fund has unused realized capital loss carryforwards for
federal income tax purposes of $31,439,000, $12,897,000 of which expire in 1996,
$1,432,000 in 1997, and $17,110,000 thereafter through 2003. The fund intends to
retain gains realized in future years that may be offset by available capital
loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, $6,504,000 of
undistributed net investment income and $10,833,000 of undistributed net
realized gains were reclassified as a $4,329,000 decrease to paid-in-capital
during the year ended May 31, 1995. The results of operations and net assets
were not affected by the reclassifications.
At May 31, 1995, the aggregate cost of investments for federal income tax
and financial reporting purposes was $912,846,000 and net unrealized gain
aggregated $25,237,000, of which $30,779,000 related to appreciated investments
and $5,542,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management fee,
of which $333,000 was payable at May 31, 1995. The fee is computed daily and
paid monthly, and consists of an Individual Fund Fee equal to 0.15% of average
daily net assets and a Group Fee. The Group Fee is based on the combined assets
of certain mutual funds sponsored by the Manager or Rowe-Price Fleming
International, Inc. (the Group). The Group Fee rate ranges from 0.48% for the
first $1 billion of assets to 0.31% for assets in excess of $34 billion. At May
31, 1995, and for the year then ended, the effective annual Group Fee rate was
0.34%. The fund pays a pro rata share of the Group Fee based on the ratio of its
net assets to those of the Group.
In addition, the fund has entered into agreements with the Manager and two
wholly owned subsidiaries of the Manager, pursuant to which the fund receives
certain other services. The Manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. (TRPS) is the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. Additionally, the fund is one of several T. Rowe
Price mutual funds (the Underlying Funds) in which the T. Rowe Price Spectrum
Income Fund (Spectrum) invests. In accordance with an Agreement among Spectrum,
the Underlying Funds, the Manager and TRPS, expenses from the operation of
Spectrum are borne by the Underlying Funds based on each Underlying Fund's
proportionate share of assets owned by Spectrum. The fund incurred expenses
pursuant to these related party agreements totaling approximately $1,310,000 for
the year ended May 31, 1995, of which $124,000 was payable at year-end.
<PAGE>
Financial Highlights
T. Rowe Price GNMA Fund
<TABLE>
For a share outstanding throughout each period
<S> <C> <C> <C> <C> <C> <C>
Three Months
Year ended ended Year ended
May 31, May 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1995 1994 1994 1993 1992 1991
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 9.14 $ 9.60 $ 9.92 $ 9.79 $ 9.47 $ 9.16
------ ------ ------ ------ ------ ------
Investment Activities
Net investment income ................. 0.68 0.17 0.68 0.75 0.80 0.83
Net realized and unrealized gain (loss) 0.37 (0.46) (0.32) 0.13 0.32 0.31
------ ------ ------ ------ ------ ------
Total from Investment Activities ...... 1.05 (0.29) 0.36 0.88 1.12 1.14
------ ------ ------ ------ ------ ------
Distributions
Net investment income ................. (0.66) (0.17) (0.68 (0.75) (0.80) (0.83)
Tax return of capital ................. (0.02) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions ................... (0.68) (0.17) (0.68 (0.75) (0.80) (0.83)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD .......... $ 9.51 $ 9.14 $ 9.60 $ 9.92 $ 9.79 $ 9.47
====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Total Return ............................ 12.11% (3.03)% 3.71% 9.36% 12.28% 13.02%
Ratio of Expenses to Average Net Assets . 0.76% 0.76% 0.77% 0.79% 0.86% 0.85%
Ratio of Net Investment Income
to Average Net Assets ................. 7.50% 7.24% 6.93% 7.65% 8.25% 8.94%
Portfolio Turnover Rate ................. 121.3% 151.8% 92.5% 94.2% 66.0% 91.8%
Net Assets, End of Period
(in thousands) $810,467 $802,304 $883,391 $913,722 $715,259 $468,969
<FN>
The fund's fiscal year-end was changed to May 31. Annualized.
</FN>
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of the#
T. Rowe Price GNMA Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per share
data and information (which appears under the heading "Financial Highlights")
present fairly, in all material respects, the financial position of the T. Rowe
Price GNMA Fund at May 31, 1995, and the results of its operations, the changes
in its net assets and the selected per share data and information for each of
the fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and
information (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at May 31, 1995 by the
correspondence with the custodian and brokers and, where appropriate, the
application of alternative auditing procedures for unsettled security
transactions, provides a reasonable basis for the opinion expressed above.
PRICE
WATERHOUSE LLP
Baltimore, Maryland
June 19, 1995
