Annual Report
U.S.
Treasury
Funds
May 31, 1999
T. Rowe Price
Report Highlights
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U.S. Treasury Funds
o Inflation fears pushed interest rates up during the past six months,
depressing bond fund prices; money fund yields, however, should benefit.
o The U.S. Treasury Money Fund's dividend slipped modestly, but the fund
outperformed its peer group.
o The U.S. Treasury Intermediate and the U.S. Treasury Long-Term Funds
lagged their peer average for the six months, but outperformed for the full
year.
o Both U.S. Treasury Intermediate and U.S. Treasury Long-Term were helped
by mortgage holdings, which did better than Treasuries in recent months.
o Although the Fed may tighten monetary policy, interest rates appear to
anticipate such a move at current levels.
Fellow Shareholders
Interest rates fell significantly in the first half of the funds' fiscal year,
but better-than-expected U.S. economic data and related inflation concerns led
to a resurgence in rates for the six months ended May 31, 1999. Although money
funds were affected in only a limited way by this reversal of fortune,
longer-term bonds and notes declined. Your funds posted mixed performance during
this time frame, but each posted superior results for the full one-year period.
MARKET ENVIRONMENT
The Federal Reserve lowered the federal funds target rate from 5.50% to
4.75% in three 25-basis-point moves between late September and mid-November
of last year (100 basis points equal one percentage point). The decision to
ease monetary conditions was primarily driven by concerns about
international problems. Russia had defaulted on its debt, investors sold
off lower-quality securities, and a very large hedge fund had to be bailed
out. In addition, the markets for emerging markets bonds and stocks
experienced a virtual meltdown.
Interest Rate Levels
30-Yr TB 5-Yr TN 90-Day TB
5/31/98 5.81 5.56 5
5.63 5.47 5.08
5.72 5.5 5.07
8/98 5.24 4.78 4.9
5.11 4.43 4.27
5.15 4.24 4.32
11/98 5.07 4.49 4.5
5.1 4.54 4.48
5.09 4.54 4.48
2/99 5.58 5.2 4.65
5.63 5.11 4.44
5.66 5.21 4.55
5/31/99 5.83 5.58 4.65
The rate cuts added liquidity to the global system and, by early spring of
this year, overseas financial markets had largely regained their footing-so
much so, in fact, that investors turned their attention to the domestic
economic situation. Despite international turmoil, the U.S. economy
continued to be stronger than expected. GDP growth was 4.2% over the last
quarter of 1998 and the first of 1999. Jobless claims remained low, and
consumer sentiment and spending were robust. The U.S. manufacturing sector
showed signs that it had recovered from the Asia crisis of late 1997. And
while domestic inflation remained largely subdued, commodity prices crept
up and tight labor markets put upward pressure on inflation.
The circumstances suggested to many investors that the Fed might reverse
course and raise rates. As a result, interest rates made a full 180-degree
turn from the prior period's declines. February was the worst month in this
period, when rates rose as quickly and tenaciously as they had fallen
earlier. As the accompanying interest rate chart shows, intermediate and
longer-term Treasury bond yields finished the year at or slightly above
year-ago levels after bottoming toward the end of 1998. In May the market
learned that the Fed had adopted a bias toward higher short-term rates,
and, by the end of May, it seemed likely that the Fed would act sooner
rather than later, perhaps at its late June meeting.
During the past six months, Treasuries did less well than higher-yielding
segments of the bond market, especially mortgage-backed bonds, which tend
to hold their value better as interest rates rise. Their yield spread
versus Treasuries (that is, the difference in their yields) tightened from
the wide levels of late 1998. This trend indicated that investors felt
renewed confidence in the global economy and were no longer demanding
securities carrying the full faith and credit backing of the U.S.
government to the exclusion of others.
U.S. TREASURY MONEY FUND
Performance Comparison
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Periods Ended 5/31/99 6 Months 12 Months
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U.S. Treasury Money Fund 2.07% 4.46%
Lipper U.S. Treasury
Money Market Funds Average 2.02 4.36
Once again, your fund outpaced the average Treasury money fund return
during the past year. For the six and 12 months ended May 31, 1999, it
returned 2.07% and 4.46%, versus returns 2.02% and 4.36%, respectively, for
the Lipper peer group average. The cumulative effects of seven months of
very low interest rates could be seen in the fund's distributions and
dividend yield, which slipped considerably from the previous period. As
rates have headed somewhat higher, however, we expect that the current
yield is likely to stabilize or move higher as the year progresses.
For some time, we have maintained a relatively long weighted average
maturity. Throughout most of the last six months, the fund was at least 10
days longer than the average 100% Treasury money fund, allowing us to take
advantage of the higher yields available on longer-term instruments. This
strategy helps the fund outperform when these longer instruments yield
significantly more than shorter securities, as was the case in the last
three months. Late in the period, however, we became concerned that
short-term rates might be heading higher and moved the fund's average
maturity in line with other money market funds.
We continued to employ a "laddered" maturity structure during the period,
dividing assets among sets of issues with fairly evenly spaced maturities
to achieve the desired average. This approach allows us to add
diversification as well as liquidity to the portfolio. Treasuries in our
universe tend to mature or pay their coupons on only certain days each
month; spreading out our holdings by maturity prevents us from having to
reinvest a significant amount of money at one time. This structure will
also help us remain as liquid as possible as we move closer to the end of
this year and enter the new millennium.
U.S. TREASURY INTERMEDIATE FUND
Performance Comparison
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Periods Ended 5/31/99 6 Months 12 Months
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U.S. Treasury Intermediate Fund -2.40% 4.28%
Lipper Average of Intermediate
U.S. Treasury Funds -1.76 3.83
With intermediate-term Treasuries struggling during the most recent
six-month period, your fund gave back a portion of the outstanding gains it
produced in the first half of the fiscal year. Its -2.40% total return for
the six months reflected a share price decline of $0.33, and was 64 basis
points behind the Lipper Average of Intermediate U.S. Treasury Funds.
However, at 4.28%, performance for the full year remained well ahead of the
results for the Lipper average.
The fund trailed the Lipper average in the second half of the year
primarily because its duration is somewhat longer than that of the average
peer. (Duration is a measure of price sensitivity to changes in interest
rates where higher, or "longer," numbers mean greater potential for price
fluctuation.) There are generally higher yields available on longer bonds,
and the strategy has served the fund well over time. When rates rise,
however, as they did during the past six months, a longer duration can
produce lower results. As we became concerned about the trend in rates in
early spring, we reduced duration: between November 30 of last year and the
period's end, duration moved from 5.3 years to 4.9 years.
The fund's duration remains slightly longer than our peer-group average. We
continue to believe that this strategy will produce the best long-term
performance-both in terms of income and appreciation-as long as interest
rates do not rise dramatically over the long term. Our performance for the
full year underscores this belief: the fund produced good 12-month returns
because it posted superior results when rates fell early in the period. We
expect to maintain a somewhat long duration consistent with our longer-term
outlook for slowing domestic growth (see the "Outlook" section).
We continued to maintain our position in mortgage securities near 15%-the
maximum allowed-which benefited your fund as mortgages outperformed
Treasuries in both the six-month and one-year time frames. Holding
mortgages also provided a particularly valuable buffer against losses
during the volatile rate environment of the second half. We will continue
to seek appropriate exposure to the mortgage sector, as it effectively
provides additional diversification and enhances the fund's income and
total return potential.
U.S. TREASURY LONG-TERM FUND
Performance Comparison
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Periods Ended 5/31/99 6 Months 12 Months
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U.S. Treasury Long-Term Fund -5.63% 3.06%
Lipper Average of General
U.S. Treasury Funds -4.00 2.30
For long-term Treasuries, the past six months were nearly as challenging as
the previous six months were rewarding. Between November 30, 1998, and May
31, 1999, the Lipper Average of General U.S. Treasury Funds produced a 4%
loss as yields on 30-year Treasuries climbed more than 75 basis points.
Your fund declined 5.63% due to its relatively long duration. However, that
same strategy strongly benefited the fund earlier in the year, so that for
the 12-month period it outperformed its Lipper group by a wide margin.
Dividends per share of $0.31 for the six months and $0.62 cents for the 12
months offset a $0.32 decline in the fund's share price over the last year.
The most important factor affecting fund performance was its duration (see
U.S. Treasury Intermediate for an explanation of duration). We generally
maintain a long-duration strategy not only to take advantage of
flat-to-declining interest rates, but also to obtain a more generous income
stream for fund investors. At November 30, the fund's duration was 11.7
years-longer than its average peer fund-which allowed it to substantially
outstrip its competitors as interest rates dropped last fall. As we
mentioned in our last report, however, this strategy is vulnerable to
rising interest rates. As rates rose during the past six months, therefore,
we took steps to bring duration back into line with our peer group. This
"neutral" duration with respect to our competitors helped head off losses
as the period progressed.
We continued to selectively add intermediate bonds to the fund's investment
mix. As the yield curve has flattened, the yield and total return potential
in this segment have become quite attractive; we can garner solid income
from these issues with less of the volatility typical of longer-term
Treasuries. A 14.5% stake in mortgage-backed securities (close to the fund
maximum of 15%) was also important to our results, as mortgages
outperformed Treasuries during the past six months. In this sector, we
continued to focus on mortgage products that are structured to offer better
prepayment protection against declining rates.
We sought to diversify the portfolio with other types of securities as
well. We purchased some zero-coupon bonds when our analysis indicated they
offered a yield advantage over standard Treasuries. A position in premium
issues (Treasuries with above-average coupons) helped to boost yield and
curtail interest rate risk. Finally, we occasionally purchased U.S.
Treasury inflation-protected securities (TIPS). These bonds are structured
so that when inflation rises their principal increases while their coupon
remains the same, leading to a higher income stream. TIPS outperformed as
inflation data ticked up in the last several months.
OUTLOOK
We believe the economy will slow over the next year relative to last year's
strong growth, but do not expect a pronounced slowdown. Robust consumer
demand will likely keep GDP growth above 3.0%. Consumption shows some signs
of abating from the fervent pace of the last two quarters, but there is
little evidence of slowing in the manufacturing sector. Despite the 0.7%
jump in April, the consumer price index was flat in May, and the
preponderance of evidence suggests that broad-based inflation will remain
at fairly low levels.
It is likely that the Federal Reserve will tighten monetary policy in light
of the continued strong economy and tight labor markets-normally a negative
for the bond market. However, interest rates have already moved to levels
that seem to discount at least one and maybe two 25-basis-point rate hikes.
For the near term, we will likely keep the interest rate posture in each of
the funds on a par with our peer group averages in light of the Fed's
upcoming rate decisions.
Respectfully submitted,
William T. Reynolds
President
June 21, 1999
Operational Changes to the Bond Funds
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The Board of Directors of the U.S. Treasury Intermediate and the U.S. Treasury
Long-Term Funds has approved a change in the funds' investment programs,
effective July 1, 1999, that will allow them to use futures. The Investment
Advisory Committee for the funds believes that futures could be used as an
effective investment management tool to more accurately control interest rate
risk and increase total return potential. The funds do not intend to use futures
in such a way as to increase volatility.
Note: The following explanation of futures updates the U.S. Treasury
Funds prospectus of October 1, 1998.
Futures (a type of potentially high-risk derivative) are often used to manage or
hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. The funds may buy and sell futures contracts for
any number of reasons, including: to manage exposure to changes in interest
rates and bond prices; as an efficient means of adjusting overall exposure to
the market; in an effort to enhance income; to protect the value of portfolio
securities; and, to adjust portfolio duration.
Futures contracts may not always be successful hedges, and their prices can be
highly volatile. Using them could lower the fund's total return, and the
potential loss from the use of futures can exceed the fund's initial investment
in such contracts. Initial margin deposits and premiums on options used for
nonhedging purposes will not equal more than 5% of the fund's net asset value.
T. Rowe Price U.S. Treasury Funds
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Portfolio Highlights
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KEY STATISTICS
11/30/98 5/31/99
U.S. Treasury Money Fund
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Price Per Share $ 1.00 $ 1.00
Dividends Per Share
For 6 months 0.023 0.021
For 12 months 0.047 0.044
Dividend Yield (7-Day Compound) * 4.36% 4.13%
Weighted Average Maturity (days) 79 75
Weighted Average Quality ** First Tier First Tier
U.S. Treasury Intermediate Fund
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Price Per Share $ 5.52 $ 5.19
Dividends Per Share
For 6 months 0.14 0.13
For 12 months 0.29 0.27
Dividend Yield *
For 6 months 5.19% 5.14%
For 12 months 5.47 5.35
30-Day Standardized Yield 4.45 5.10
Weighted Average Maturity (years) 6.6 6.3
Weighted Average Effective Duration (years) 5.3 4.9
Weighted Average Quality *** AAA AAA
(continued on next page)
T. Rowe Price U.S. Treasury Funds
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Portfolio Highlights
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KEY STATISTICS
11/30/98 5/31/99
U.S. Treasury Long-Term Fund
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Price Per Share $ 12.12 $ 11.07
Dividends Per Share
For 6 months 0.31 0.31
For 12 months 0.63 0.62
Dividend Yield *
For 6 months 5.29% 5.68%
For 12 months 5.56 5.74
30-Day Standardized Yield 4.92 5.48
Weighted Average Maturity (years) 22.2 17.6
Weighted Average Effective Duration (years) 11.7 10.6
Weighted Average Quality *** AAA AAA
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the
period.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
Note: Investments in the U.S. Treasury Funds are neither insured nor
guaranteed by the U.S. government.
T. Rowe Price U.S. Treasury Funds
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Performance Comparison
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These charts show the value of a hypothetical $10,000 investment in each
fund over the past 10 fiscal year periods or since inception (for funds
lacking 10-year records). The result is compared with a broad-based average
or index. An index return does not reflect expenses, which have been
deducted from the fund's return.
U.S. TREASURY MONEY FUND
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Lipper U.S. Treasury U.S. Treasury Money
Money Fund $16,091 Fund $16,003
5/89 10000 10000
5/90 10812 10794
5/91 11566 11521
5/92 12097 12038
5/93 12436 12364
5/94 12767 12688
5/95 13352 13269
5/96 14023 13942
5/97 14688 14602
5/98 15408 15319
5/99 16091 16003
U.S. TREASURY INTERMEDIATE FUND
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Salomon Smith Barney U.S. Treasury
1-7 Year Treasury Intermediate
ndex $20,148 Fund $19,908
9/29/89 10000 10000
5/90 10519 10480
5/91 11747 11657
5/92 13051 12975
5/93 14281 14361
5/94 14494 14462
5/95 15712 15805
5/96 16606 16362
5/97 17743 17422
5/98 19165 19091
5/99 20148 19908
T. Rowe Price U.S. Treasury Funds
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Performance Comparison
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U.S. TREASURY LONG-TERM FUND
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Salomon Smith Barney U.S. Treasury Long-Term
Treasury Index $21,349 Fund $22,339
9/29/89 10000 10000
5/90 10426 10301
5/91 11669 11418
5/92 13070 12766
5/93 14658 14557
5/94 14822 14543
5/95 16436 16760
5/96 17091 16932
5/97 18364 18281
5/98 20442 21676
5/99 21349 22339
Average Annual Compound Total Return
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This table shows how each fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 5/31/99 1 Year 5 Years 10 Years Inception Date
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U.S. Treasury
Money Fund 4.46% 4.75% 4.81% - 6/28/82
U.S. Treasury
Intermediate Fund 4.28 6.60 - 7.38% 9/29/89
U.S. Treasury
Long-Term Fund 3.06 8.96 - 8.67 9/29/89
Investment return represents past performance and will vary. Shares of the bond
funds may be worth more or less at redemption than at original purchase.
Investments in the Money Fund are not insured or guaranteed by the FDIC or any
other government agency. Although it seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
fund.
T. Rowe Price U.S. Treasury Money Fund
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Financial Highlights For a share outstanding throughout each period
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Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment income 0.044 0.048 0.046 0.050 0.045
Distributions
Net investment income (0.044) (0.048) (0.046) (0.050) (0.045)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------------------------------------------------
Ratios/Supplemental Data
Total return(*) 4.46% 4.91% 4.74% 5.08% 4.58%
Ratio of total expenses to
average net assets 0.51% 0.51% 0.56% 0.53% 0.56%
Ratio of net investment
income to average
net assets 4.37% 4.82% 4.65% 4.93% 4.51%
Net assets,
end of period
(in thousands) $889,945 $846,586 $821,075 $760,010 $719,215
(*) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Intermediate Fund
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Financial Highlights For a share outstanding throughout each period
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Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
NET ASSET VALUE
Beginning of period $ 5.30 $ 5.12 $ 5.11 $ 5.25 $ 5.11
Investment activities
Net investment income 0.27 0.30 0.31 0.33 0.31
Net realized and
unrealized gain (loss) (0.04) 0.18 0.01 (0.14) 0.14
Total from
investment activities 0.23 0.48 0.32 0.19 0.45
Distributions
Net investment income (0.27) (0.30) (0.31) (0.33) (0.31)
Net realized gain (0.07) -- -- -- --
Total distributions (0.34) (0.30) (0.31) (0.33) (0.31)
NET ASSET VALUE
End of period $ 5.19 $ 5.30 $ 5.12 $ 5.11 $ 5.25
-----------------------------------------------------
Ratios/Supplemental Data
Total return(*) 4.28% 9.58% 6.48% 3.52% 9.29%
Ratio of total expenses to
average net assets 0.62% 0.61% 0.64% 0.65% 0.69%
Ratio of net investment
income to average
net assets 5.02% 5.72% 6.11% 6.14% 6.19%
Portfolio turnover rate 61.2% 112.8% 57.9% 40.7% 81.1%
Net assets,
end of period
(in thousands) $255,987 $203,027 $180,609 $174,176 $172,666
(*) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Long-Term Fund
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Financial Highlights For a share outstanding throughout each period
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Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
NET ASSET VALUE
Beginning of period $ 11.39 $ 10.17 $ 10.02 $ 10.54 $ 9.81
Investment activities
Net investment income 0.62 0.63 0.63 0.65* 0.68*
Net realized and
unrealized gain (loss) (0.25) 1.22 0.15 (0.52) 0.73
Total from
investment activities 0.37 1.85 0.78 0.13 1.41
Distributions
Net investment income (0.62) (0.63) (0.63) (0.65) (0.68)
Net realized gain (0.07) -- -- -- --
Total distributions (0.69) (0.63) (0.63) (0.65) (0.68)
NET ASSET VALUE
End of period $ 11.07 $ 11.39 $ 10.17 $ 10.02 $ 10.54
Ratios/Supplemental Data
Total return(#) 3.06% 18.58% 7.97% 1.02%* 15.24%*
Ratio of total expenses to
average net assets 0.66% 0.67% 0.80% 0.80%* 0.80%*
Ratio of net investment
income to average
net assets 5.30% 5.71% 6.22% 6.05%* 7.05%*
Portfolio turnover rate 74.1% 80.8% 67.6% 60.1% 99.3%
Net assets,
end of period
(in thousands) $333,535 $275,850 $ 71,263 $ 70,326 $ 65,284
(#) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* Excludes expenses in excess of a 0.80% voluntary expense limitation in
effect through 5/31/99.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Money Fund
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May 31, 1999
Statement of Net Assets Par Value
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In thousands
U.S. TREASURY OBLIGATIONS 97.6%
U.S. Treasury Bills
4.20%, 6/3/99 $ 7,130 $ 7,128
4.24%, 6/3/99 8,324 8,322
4.25%, 6/10 - 6/24/99 55,786 55,644
4.34%, 6/3/99 50,000 49,988
4.35%, 7/29/99 558 554
4.36%, 6/17 - 7/29/99 55,714 55,398
4.37%, 6/10 - 6/24/99 50,000 49,903
4.38%, 6/17 - 7/29/99 26,905 26,843
4.395%, 6/3/99 7,137 7,135
4.40%, 7/29/99 25,000 24,823
4.455%, 6/10/99 63,087 63,017
U.S. Treasury Notes
5.375%, 1/31/00 18,000 18,068
5.50%, 3/31 - 5/31/00 20,000 20,088
5.625%, 11/30/99 15,000 15,057
5.875%, 8/31/99 - 2/15/00 105,000 105,367
6.00%, 6/30 - 10/15/99 135,000 135,314
6.375%, 7/15/99 100,000 100,213
6.75%, 6/30/99 10,000 10,013
6.875%, 8/31/99 10,000 10,055
7.125%, 9/30/99 95,000 95,748
7.875%, 11/15/99 10,000 10,137
Total U.S. Treasury Obligations (Cost $868,815) 868,815
Total Investments in Securities
97.6% of Net Assets (Cost $868,815) $868,815
Other Assets Less Liabilities 21,130
NET ASSETS $889,945
----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $81
Accumulated net realized gain/loss - net of distributions 186
Paid-in-capital applicable to 889,756,758 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares
of the Corporation authorized 889,678
NET ASSETS $889,945
----------
NET ASSET VALUE PER SHARE $1.00
----------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Intermediate Fund
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May 31, 1999
Statement of Net Assets Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT OBLIGATIONS 83.0%
U.S. Treasury Obligations 83.0%
U.S. Treasury Bonds
9.375%, 2/15/06 $ 5,150 $ 6,162
11.625%, 11/15/04 6,800 8,633
12.00%, 5/15/05 19,300 25,262
U.S. Treasury Inflationary-Indexed Notes
3.375%, 1/15/07 6,769 6,561
3.625%, 7/15/02 474 474
U.S. Treasury Notes
Zero Coupon, 8/15/03 3,300 2,601
Zero Coupon, 2/15/04 33,300 25,539
Zero Coupon, 2/15/05 25,200 18,178
Zero Coupon, 2/15/06 28,000 19,007
Zero Coupon, 2/15/08 16,000 9,587
Zero Coupon, 2/15/09 6,000 3,372
4.50%, 1/31/01 2,500 2,466
6.125%, 8/15/07 11,100 11,328
6.50%, 5/15/05 - 10/15/06 38,910 40,409
7.00%, 7/15/06 3,700 3,953
7.50%, 2/15/05 26,700 28,935
Total U.S. Government Obligations (Cost $216,430) 212,467
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 14.3%
U.S. Government Guaranteed Obligations 14.3%
Government National Mortgage Assn.
I
6.00%, 12/15/08 - 3/15/11 739 723
6.50%, 8/15/02 - 2/15/29 22,129 21,620
7.00%, 7/15/16 - 6/15/28 3,156 3,174
7.50%, 10/15/07 - 11/15/17 2,235 2,308
8.00%, 2/15/08 - 10/15/25 1,729 1,810
8.50%, 8/15/04 - 4/15/23 929 981
9.00%, 5/15/01 - 11/15/25 928 961
9.50%, 12/15/24 - 5/15/25 621 673
Government National Mortgage Assn.
I
10.00%, 8/15/19 $ 93 $ 102
10.50%, 11/15/14 162 180
11.00%, 12/15/09 - 12/15/19 753 842
11.50%, 3/15/10 - 2/15/18 1,329 1,505
12.50%, 10/15/13 - 3/15/15 182 211
II
9.00%, 10/20/16 - 2/20/27 124 133
9.50%, 11/20/25 150 163
10.50%, 1/20/16 - 6/20/19 551 611
GPM, I, 11.00%, 9/15/10 129 144
Midget, I
9.50%, 9/15/00 - 12/15/05 263 272
10.00%, 11/15/00 - 9/15/05 142 149
10.50%, 1/15/01 - 9/15/04 30 31
11.00%, 8/15/00 9 9
11.50%, 7/15/00 22 22
Midget, II, 11.50%, 7/20/99 - 3/20/00 1 1
Total U.S. Government Mortgage-Backed
Securities (Cost $37,038) 36,625
MONEY MARKET FUNDS 2.4%
Government Reserve Investment Fund, 4.70% # 6,095 6,095
Total Money Market Funds (Cost $6,095) 6,095
Total Investments in Securities
99.7% of Net Assets (Cost $259,563) $ 255,187
Other Assets Less Liabilities 800
NET ASSETS $ 255,987
----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (917)
Accumulated net realized gain/loss - net of distributions 2,961
Net unrealized gain (loss) (4,376)
Paid-in-capital applicable to 49,355,496 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares
of the Corporation authorized 258,319
NET ASSETS $ 255,987
----------
NET ASSET VALUE PER SHARE $5.19
----------
# Seven-day yield
GPM Graduated Payment Mortgage
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Long-Term Fund
- --------------------------------------------------------------------------------
May 31, 1999
Statement of Net Assets Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT OBLIGATIONS 83.2%
U.S. Treasury Obligations 83.2%
U.S. Treasury Bonds
6.25%, 8/15/23 $ 42,000 $ 42,825
7.125%, 2/15/23 22,700 25,570
7.25%, 5/15/16 34,450 38,502
7.50%, 11/15/24 14,500 17,125
7.625%, 2/15/25 17,275 20,702
8.75%, 5/15/17 32,000 41,019
8.875%, 2/15/19 27,150 35,551
U.S. Treasury Inflationary-Indexed Notes,
3.625%, 7/15/02 567 566
U.S. Treasury Notes
Zero Coupon, 5/15/16 70,000 24,486
Zero Coupon, 11/15/16 70,000 23,722
4.875%, 3/31/01 500 496
5.875%, 2/15/04 7,000 7,056
Total U.S. Government Obligations (Cost $275,126) 277,620
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 14.5%
U.S. Government Guaranteed Obligations 14.5%
Government National Mortgage Assn.
I
6.50%, 8/15/28 3,867 3,777
7.00%, 9/15/25 1,774 1,778
7.50%, 9/15/27 - 4/15/29 7,778 7,964
8.00%, 2/15/04 - 1/15/29 5,193 5,402
8.50%, 12/15/05 - 2/15/27 3,660 3,869
9.00%, 11/15/04 - 8/15/25 5,786 6,208
9.50%, 8/15/09 - 12/15/17 6,146 6,674
10.00%, 12/15/17 - 7/15/22 791 865
10.50%, 5/15/13 - 7/15/19 227 252
11.50%, 10/15/10 - 8/15/15 101 114
II
7.00%, 11/20/23 - 1/20/24 34 34
8.50%, 10/20/24 409 432
Government National Mortgage Assn.
REMIC
6.35%, 1/20/28 $ 5,000 $ 4,784
6.50%, 5/20/28 4,389 4,171
7.00%, 5/16/24 2,000 1,995
Interest Only, 8.00%, 6/16/23** 521 51
Total U.S. Government Mortgage-Backed
Securities (Cost $48,685) 48,370
MONEY MARKET FUNDS 1.8%
Government Reserve Investment Fund, 4.70% # 5,829 5,829
Total Money Market Funds (Cost $5,829) 5,829
Total Investments in Securities
99.5% of Net Assets (Cost $329,640) $ 331,819
Other Assets Less Liabilities 1,716
NET ASSETS $ 333,535
-----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 12
Accumulated net realized gain/loss - net of distributions 4,119
Net unrealized gain (loss) 2,179
Paid-in-capital applicable to 30,116,117 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares of
the Corporation authorized 327,225
NET ASSETS $ 333,535
-----------
NET ASSET VALUE PER SHARE $ 11.07
-----------
** For Interest Only securities, par amount represents notional principal
on which the fund receives interest.
# Seven-day yield
REMIC Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Funds
- --------------------------------------------------------------------------------
Statement of Operations
In thousands
Money Intermediate Long-Term
Fund Fund Fund
Year Year Year
Ended Ended Ended
5/31/99 5/31/99 5/31/99
Investment Income
Interest income $43,933 $14,147 $18,470
Expenses
Investment management 2,890 931 1,150
Shareholder servicing 1,424 433 659
Custody and accounting 116 107 100
Prospectus and shareholder reports 78 30 23
Registration 72 26 87
Proxy and annual meeting 25 8 6
Legal and audit 11 10 11
Directors 7 7 8
Miscellaneous 5 3 3
Total expenses 4,628 1,555 2,047
Expenses paid indirectly (6) (1) (2)
Net expenses 4,622 1,554 2,045
Net investment income 39,311 12,593 16,425
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 24 4,087 5,011
Change in net unrealized gain or loss
on securities -- (7,518) (13,040)
Net realized and unrealized gain (loss) 24 (3,431) (8,029)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 39,335 $ 9,162 $ 8,396
----------------------------------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Money Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 39,311 $ 39,724
Net realized gain (loss) 24 22
Increase (decrease) in net
assets from operations 39,335 39,746
Distributions to shareholders
Net investment income (39,311) (39,724)
Capital share transactions*
Shares sold 3,541,154 2,832,862
Distributions reinvested 37,444 38,169
Shares redeemed (3,535,263) (2,845,542)
Increase (decrease) in net assets
from capital share transactions 43,335 25,489
Net Assets
Increase (decrease) during period 43,359 25,511
Beginning of period 846,586 821,075
End of period $ 889,945 $ 846,586
----------------------------------
*Share information
Shares sold 3,541,154 2,832,862
Distributions reinvested 37,444 38,169
Shares redeemed (3,535,263) (2,845,542)
Increase (decrease) in shares outstanding 43,335 25,489
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Intermediate Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 12,593 $ 11,091
Net realized gain (loss) 4,087 3,504
Change in net unrealized gain or loss (7,518) 2,971
Increase (decrease) in net assets from opera 9,162 17,566
Distributions to shareholders
Net investment income (12,593) (11,091)
Net realized gain (3,321) --
Decrease in net assets from distributions (15,914) (11,091)
Capital share transactions*
Shares sold 159,141 70,483
Distributions reinvested 13,541 8,823
Shares redeemed (112,970) (63,363)
Increase (decrease) in net assets from capital
share transactions 59,712 15,943
Net Assets
Increase (decrease) during period 52,960 22,418
Beginning of period 203,027 180,609
End of period $ 255,987 $ 203,027
----------------------------------
*Share information
Shares sold 29,337 13,387
Distributions reinvested 2,501 1,679
Shares redeemed (20,762) (12,041)
Increase (decrease) in shares outstanding 11,076 3,025
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Long-Term Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 16,425 $ 10,211
Net realized gain (loss) 5,011 1,725
Change in net unrealized gain or loss (13,040) 13,578
Increase (decrease) in net assets
from operations 8,396 25,514
Distributions to shareholders
Net investment income (16,425) (10,211)
Net realized gain (1,812) --
Decrease in net assets
from distributions (18,237) (10,211)
Capital share transactions*
Shares sold 195,948 237,577
Distributions reinvested 17,337 9,579
Shares redeemed (145,759) (57,872)
Increase (decrease) in net assets
from capital share transactions 67,526 189,284
Net Assets
Increase (decrease) during period 57,685 204,587
Beginning of period 275,850 71,263
End of period $ 333,535 $ 275,850
*Share information
Shares sold 16,744 21,591
Distributions reinvested 1,477 859
Shares redeemed (12,318) (5,242)
Increase (decrease) in shares outstanding 5,903 17,208
The accompanying notes are an integral part of these financial statements.
T. Rowe Price U.S. Treasury Funds
- --------------------------------------------------------------------------------
May 31, 1999
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price U.S. Treasury Funds, Inc. (the corporation) is registered
under the Investment Company Act of 1940. The U.S. Treasury Money Fund (the
Money Fund), the U.S. Treasury Intermediate Fund (the Intermediate Fund),
and the U.S. Treasury Long-Term Fund (the Long-Term Fund), diversified,
open-end management investment companies, are the three portfolios
established by the corporation and commenced operations on June 28, 1982,
September 29, 1989, and September 29, 1989, respectively.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Except for securities held by the Money Fund, securities are
valued based upon market quotations. When market quotations are not readily
available, these securities are valued at a representative bid price or
yield equivalent as quoted by dealers who make markets in such securities.
Securities held by the Money Fund are valued at amortized cost.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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 that fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are
recognized upon disposition or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on
MBS acquired on or before June 8, 1997, are recognized upon disposition or
principal repayment as ordinary income. For MBS acquired after June 8,
1997, premiums are recognized as gain or loss; discounts are recognized as
gain or loss, except to the extent of accrued market discount.
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 the identified cost basis. Distributions to shareholders
are recorded by each 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. Expenses paid indirectly reflect
credits earned on daily, uninvested cash balances at the custodian, used to
reduce each fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of U.S. government securities, other than short-term
securities, for the year ended May 31, 1999, were as follows:
Intermediate Fund Long-Term Fund
U.S. government securities
Purchases $199,602,000 $290,892,000
Sales 150,244,000 226,158,000
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since each fund intends
to continue to qualify as a regulated investment company and distribute all
of its taxable income.
In order for the Intermediate Fund's capital accounts and distributions to
shareholders to reflect the tax character of certain transactions, the
following reclassifications were made during the year ended May 31, 1999.
The results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
- --------------------------------------------------------------------------------
Undistributed net investment income $15,000
Undistributed net realized gain (15,000)
At May 31, 1999, the costs of investments for the Money, Intermediate, and
Long-Term Funds for federal income tax purposes were substantially the same
as for financial reporting and totaled $868,815,000, $259,563,000, and
$329,640,000, respectively. For the Money Fund, amortized cost is
equivalent to value; and for the Intermediate and Long-Term Funds, net
unrealized gain (loss) on investments was as follows:
- --------------------------------------------------------------------------------
Intermediate Fund Long-Term Fund
Appreciated investments $569,000 $8,946,000
Depreciated investments (4,945,000) (6,767,000)
Net unrealized gain (loss) $(4,376,000) $2,179,000
-----------------------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between each fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $241,000, $81,000, and $102,000 were payable at May 31, 1999
by the Money, Intermediate, and Long-Term Funds, respectively. The fee is
computed daily and paid monthly, and consists of an individual fund fee
equal to 0.05% of average daily net assets for the Intermediate and
Long-Term Funds, and a group fee. The Money Fund does not have an
individual fee, only 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 0.30% for assets in excess
of $80 billion. At May 31, 1999, and for the year then ended, the effective
annual group fee rate was 0.32%. Each fund pays a pro-rata share of the
group fee based on the ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 1999, which would cause the
Long-Term Fund's ratio of total expenses to average net assets to exceed
0.80%. Thereafter, through May 31, 2001, the Long-Term Fund is required to
reimburse the manager for these expenses, provided that average net assets
have grown or expenses have declined sufficiently to allow reimbursement
without causing the fund's ratio of total expenses to average net assets to
exceed 0.80%.
In addition, each fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which each fund
receives certain other services. The manager computes the daily share price
and maintains the financial records of each fund. T. Rowe Price Services,
Inc. is each fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the funds. T. Rowe Price
Retirement Plan Services, Inc. provides subaccounting and recordkeeping
services for certain retirement accounts invested in each fund. The Money,
Intermediate, and Long-Term Funds incurred expenses pursuant to these
related party agreements totaling approximately $1,238,000, $413,000 and
$282,000, respectively, for the year ended May 31, 1999, of which $150,000,
$42,000 and $29,000, respectively, were payable at period-end.
Additionally, the Long-Term Fund is one of several T. Rowe Price-sponsored
mutual funds (underlying funds) in which the T. Rowe Price Spectrum Funds
(Spectrum) may invest. Spectrum does not invest in the underlying funds for
the purpose of exercising management or control. Expenses associated with
the operation of Spectrum are borne by each underlying fund to the extent
of estimated savings to it and in proportion to the average daily value of
its shares owned by Spectrum, pursuant to special servicing agreements
between and among Spectrum, the underlying funds, T. Rowe Price, and, in
the case of T. Rowe Price Spectrum International, Rowe Price-Fleming
International. Spectrum Income Fund held approximately 57.8% of the
outstanding shares of the Long-Term Fund at May 31, 1999. For the year then
ended, the Long-Term Fund was allocated $392,000 of Spectrum expenses,
$29,000 of which was payable at period-end.
The funds may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the Intermediate and the Long-Term
Funds for the year ended May 31, 1999, totaled $97,000 and $92,000,
respectively, and are reflected as interest income in the accompanying
Statement of Operations.
Tax Information (Unaudited) for the Tax Year Ended 5/31/99
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The Intermediate Fund's distributions to shareholders included:
o $3,321,000 from long-term capital gains; all of which was subject to the
20% rate gains category,
The Long-Term Fund's distributions to shareholders included:
o $1,553,000 from short-term capital gains,
o $259,000 from long-term capital gains; all of which was subject to the
20% rate gains category.
T. Rowe Price U.S. Treasury Funds
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors of T. Rowe Price U.S. Treasury Funds, Inc. and
Shareholders of U.S. Treasury Money Fund, U.S. Treasury Intermediate Fund and
U.S. Treasury Long-Term Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of U.S. Treasury Money Fund, U.S. Treasury Intermediate Fund and U.S.
Treasury Long-Term Fund (comprising T. Rowe Price U.S. Treasury Funds,
Inc., hereafter referred to as the "Funds") at May 31, 1999, and the
results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the fiscal periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Funds' 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 audits, which included confirmation of securities at May 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 17, 1999
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
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 appropriate
to the fund or funds covered in this
report.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center Plaza 5
Mezzanine Level
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
Investment With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor. C07-050 5/31/99
