T. Rowe Price Limited-Term Bond Portfolio
Semiannual Report
June 30, 1996
Dear Investor
The powerful bond market rally of 1995 ran out of steam this year due to a
surprisingly resilient economy and renewed concerns about inflation. Most
sectors of the bond market showed negative returns as interest rates rose
sharply. The Lehman Aggregate Bond Index declined 1.21% over the last six
months.
As 1996 dawned, bond prices rose modestly on the expectation of moderate
economic growth, subdued inflation, and progress toward a balanced budget.
With the economic expansion approaching its fifth anniversary, some concerns
about a recession surfaced and inflation remained moderate.
As a result, interest rates continued falling, with the five-year
Treasury note yield dropping to 5.3% in January, as shown in the chart. Late
that month, the Federal Reserve trimmed the federal funds target to 5.25%, and
the market awaited further easing to prod the sluggish economy.
Chart 1 - Yield Comparison.
As the year progressed, however, it became clear that the economy was
stronger than originally thought, growing at an annualized rate of 2.3% in the
first quarter and an estimated 4% in the second. Inflation picked up due to
higher oil and grain prices. Most troubling were concerns about rising labor
costs.
In response, the bond market quickly reversed course from an expectation
of further easing by the Fed to one of renewed tightening. By June 30, the
two- and five-year Treasury note yields had risen to 6.3% and 6.6%,
respectively - their highest levels in more than a year.
Performance and Strategy Review
A year ago, we began increasing your portfolio's price sensitivity to interest
rate movements by lengthening duration. (Duration is a measure of a bond
portfolio's price sensitivity to interest rate changes. A longer duration
enhances price appreciation if interest rates fall, but leads to steeper price
declines if rates rise.) This strategy proved beneficial as interest rates
generally declined and bond prices rose in the last half of 1995.
On December 31, duration stood at 2.8 years, slightly longer than our
peer group. We shortened duration modestly when the bond market soured in
1996, reducing it to 2.6 years by the end of June, closer to its peer group.
Nevertheless, your portfolio lagged the peer group for both the 6- and
12-month periods ended June 30 due to its slightly longer duration as interest
rates rose sharply in recent months. (Note: The portfolio's peer group was
changed to the one shown in the table, which Lipper Analytical Services
considers more appropriate. Over the 6- and 12-month periods ended June 30,
our previous benchmark, the Lipper Short Investment-Grade Debt Funds Average
returned 1.18% and 5.05%, respectively.)
Performance Comparison
Periods Ended 6/30/96
6 Months 12 Months
________ ________
Limited-Term Bond Portfolio -0.54% 3.71%
Lipper Short Intermediate
Investment-Grade
Debt Funds Average 0.27 4.91
Our strategy has been focused on reducing the fund's sensitivity to
interest rates. We trimmed our holdings of U.S. Treasuries from 30% last
December to 24% in June, redeploying the proceeds into additional corporate
bonds and mortgage-backed securities, which are less vulnerable to rising
interest rates and offer higher levels of income. Mortgages now represent 21%
of net assets, as shown in the table following this letter, up from 18% last
December.
We also shifted our holdings of corporate securities, increasing
exposure to cyclical sectors like transportation and utilities, which
typically benefit from a strengthening economy. Despite improving fundamentals
in select issuers, concerns over the restructuring of the utility industry
resulted in depressed valuations in this sector. We took advantage of the
relative value by raising our exposure to utilities from 3% to 7% of net
assets.
In our last report to you, we mentioned our concern about a slowdown in
corporate earnings in some industries. Although sporadic earnings
disappointments have surfaced, most corporations continue to do well and the
economy remains strong. Consequently, we maintained our exposure to corporate
securities (including asset-backed issues) at 41% of net assets. We continued
to maintain high overall credit quality, with 85% of assets invested in
securities rated A or better.
Summary and Outlook
The strength of the economy generally surprised the financial markets. The
concern now is whether the economy is growing too fast, raising the specter of
a pickup in inflation. As always, the bond market considered the prospect of
accelerating inflation daunting, as interest rates rose significantly since
late last year.
In our view, it is possible that the bond market may experience further
weakness in the months ahead, although the recent rise in yields may have
discounted much of the news on the inflation front. We believe bond returns
for the rest of the year will more likely come from income than from price
appreciation.
Respectfully submitted,
Edward A. Wiese
Executive Vice President
and Chairman of the Investment
Advisory Committee
July 24, 1996
Chart 2 - SEC Performance Comparison
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended June 30, 1996
Since Inception
1 Year 5/13/94
_______ ________________
3.71% 5.53%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase. Performance does not reflect insurance company contract and other
separate account charges. If these charges were deducted, performance would be
lower.
Portfolio Highlights
T. Rowe Price Limited-Term Bond Portfolio /June 30, 1996
Key Statistics
Periods Ended
Dividend Yield* 6/30/96
___________________________________ ____________
6 Months 5.87%
12 Months 6.27
Dividend Per Share
6 Months $0.14
12 Months 0.30
Change in Price Per Share
6 Months (From $5.06 to $4.89) $-0.17
12 Months (From $5.01 to $4.89) -0.12
Weighted Average Maturity 3.3 yrs.
Weighted Average Effective Duration 2.6 yrs.
* 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.
Quality Diversification
Percent of Net Assets
Quality Rating* 12/31/95 6/30/96
_____________ _______ _______
AAA 65% 56%
AA 2 7
A 17 22
BBB 12 13
BB 2 2
B 2 0
Weighted Average Quality 1.95 1.98
* Based on T. Rowe Price research.
Sector Diversification
Percent of Net Assets
12/31/95 6/30/96
_______ _______
U.S. Treasury Obligations 30% 24%
Mortgage-Backed Securities 18 21
Commercial Paper 14 11
Industrials 9 10
Utilities 3 7
Finance and Credit 2 5
Banking 7 4
Investment Dealers 4 4
Asset-Backed Securities 2 4
All Others 11 10
Statement of Net Assets
T. Rowe Price Limited-Term Bond Portfolio / June 30, 1996 (Unaudited)
(in thousands)
Amount Value
_________ _________
Corporate Bonds and Notes - 37.4%
Banking - 4.0%
Barnett Banks, Sub. Notes, 8.50%, 3/1/99. . . . $ 75 $ 78
Chase Manhattan, Sub. Notes, 8.00%, 4/15/02 . . 35 35
Credit Foncier France, 8.00%, 2/23/98 . . . . . 100 102
Firstar, Sub. Notes, 7.15%, 9/1/00. . . . . . . 15 15
Northern Trust, MTN, 9.15%, 3/13/98 . . . . . . 25 26
Shawmut, Deb., 8.125%, 2/1/97 . . . . . . . . . 50 51
Union Planters, Sub. Notes, 6.25%, 11/1/03. . . 25 24
331
Consumer Products - 0.8%
Coleman, Sr. Secured Disc. Notes,
Zero Coupon, 5/27/98. . . . . . . . . . . . . 15 13
General Mills, MTN, 7.16%, 10/3/97. . . . . . . 25 25
Pepsico, MTN, 6.80%, 5/15/00. . . . . . . . . . 25 25
63
Energy - 0.0%
Petroleum Heat and Power, Sr. Sub. Deb.,
12.25%, 2/1/05. . . . . . . . . . . . . . . . 3 3
Finance and Credit - 5.2%
Advanta, MTN, 7.00%, 5/1/01 . . . . . . . . . . 75 74
Aristar, Sr. Notes, 7.875%, 2/15/99 . . . . . . 50 51
Heller Financial, Notes, 5.625%, 3/15/00. . . . 100 96
HSBC Finance Nederland, Sub. Gtd. Notes,
(144a), 7.40%, 4/15/03. . . . . . . . . . . . 80 80
Prudential Insurance Company of America, Notes,
(144a), 6.875%, 4/15/03 . . . . . . . . . . . 100 97
Washington Mutual, Sr. Notes,
7.25%, 8/15/05. . . . . . . . . . . . . . . . 25 25
423
Industrials - 10.5%
Agricultural Minerals, Sr. Notes,
10.75%, 9/30/03 . . . . . . . . . . . . . . . 15 16
Boise Cascade, Deb., 9.85%, 6/15/02 . . . . . . 100 112
Burlington Industries, Notes, 7.25%, 9/15/05. . 50 48
Coltec Industries, Sr. Sub. Notes,
10.25%, 4/1/02. . . . . . . . . . . . . . . . 20 20
Cyprus Minerals, Deb., 10.125%, 4/1/02. . . . . 100 113
Ford Motor Credit, MTN, 8.21%, 3/16/99. . . . . 100 104
Freeport-McMoRan Resources, Sr. Notes,
7.00%, 2/15/08. . . . . . . . . . . . . . . . 50 46
General Motors Acceptance Corporation
Deb., 8.625%, 7/15/96. . . . . . . . . . . . 50 50
MTN, 6.125%, 4/23/98. . . . . . . . . . . . . 100 99
IMC Fertilizer Group, 9.45%, 12/15/11 . . . . . 15 15
International Paper, Deb., 9.70%, 3/15/00 . . . 100 109
Lockheed, Deb., 9.375%, 10/15/99. . . . . . . . 15 16
Lockheed Martin, Notes, 6.55%, 5/15/99. . . . . 85 85
Methanex, Notes, 7.40%, 8/15/02 . . . . . . . . 25 25
858
Investment Dealers - 3.7%
Bear Stearns, Sr. Notes, 7.625%, 9/15/99. . . . 80 82
Merrill Lynch, Notes, 7.05%, 4/15/03. . . . . . 100 98
Morgan Stanley, Deb., 8.00%, 10/15/96 . . . . . $ 50 $ 50
Salomon, MTN, 5.90%, 2/9/98 . . . . . . . . . . 75 74
304
Media and Communications - 2.3%
Cox Communication, Notes, 6.375%, 6/15/00 . . . 25 25
News America Holdings, Sr. Notes, 7.50%, 3/1/00 25 25
TCI Communications, Notes, 7.25%, 6/15/99 . . . 100 100
Time Warner, Notes, 7.95%, 2/1/00 . . . . . . . 25 26
Young Broadcasting, Sr. Sub. Notes,
11.75%, 11/15/04. . . . . . . . . . . . . . . 15 16
192
Petroleum - 0.3%
Occidental Petroleum, MTN, 5.85%, 11/9/98 . . . 25 25
Retail - 1.5%
Federated Department Stores, Sr. Notes,
10.00%, 2/15/01 . . . . . . . . . . . . . . . 15 16
Sears Roebuck & Co., MTN, 8.23%, 5/4/99 . . . . 100 104
120
Telephone - 0.6%
U.S. West Capital Funding, MTN, 6.50%, 11/11/02 50 48
Transportation - 1.8%
Burlington Northern, Notes, 7.40%, 5/15/99. . . 75 76
Federal Express, Notes, 6.25%, 4/15/98. . . . . 22 22
Union Pacific, Notes, 7.00%, 6/15/00. . . . . . 50 50
148
Utilities - 6.7%
Baltimore Gas & Electric, 1st Mtg. Notes,
8.40%, 10/15/99 . . . . . . . . . . . . . . . 100 105
Commonwealth Edison, 1st Mtg. Bonds,
9.375%, 2/15/00 . . . . . . . . . . . . . . . 75 80
Consumers Power, 1st Mtg. Bonds, 6.875%, 5/1/98 15 15
Detroit Edison, Sec. MTN, 6.27%, 3/15/00. . . . 30 29
Long Island Lighting, Gen. & Ref. Bonds,
8.75%, 2/15/97. . . . . . . . . . . . . . . . 40 40
Niagara Mohawk Power, 1st Mtg. Bonds,
5.875%, 11/1/96 . . . . . . . . . . . . . . . 12 12
Orange & Rockland Utilities, Deb.,
6.14%, 3/1/00 . . . . . . . . . . . . . . . . 50 49
Pacific Gas & Electric, 1st Mtg. Bonds,
8.75%, 1/1/01 . . . . . . . . . . . . . . . . 50 53
Public Service Electric & Gas,
1st Ref. Mtg. Bonds, 6.25%, 1/1/07. . . . . . 75 69
System Energy Resources, 1st Mtg. Notes,
6.00%, 4/1/98 . . . . . . . . . . . . . . . . 100 99
551
Total Corporate Bonds and Notes (Cost $3,100) 3,066
Warrants - 0.0%
Hotels and Gaming- 0.0%
President Casinos, Warrants *#. . . . . . . . . 1 0
Total Warrants (Cost $1) 0
U.S. Government Obligations - 24.0%
U.S. Government Agency Obligations - 0.4%
Federal Home Loan Mortgage, 6.725%, 8/15/00 . . $ 30 $ 30
U.S. Treasury Obligations - 23.6%
U.S. Treasury Notes
5.25%, 12/31/97 . . . . . . . . . . . . . . . 75 74
5.75%, 10/31/00 . . . . . . . . . . . . . . . 75 73
5.875%, 8/15/98 . . . . . . . . . . . . . . . 125 124
6.375%, 5/15/99 . . . . . . . . . . . . . . . 150 150
6.50%, 5/31/01 - 8/15/05. . . . . . . . . . . 250 249
6.875%, 3/31/00 . . . . . . . . . . . . . . . 450 457
7.50%, 5/15/02. . . . . . . . . . . . . . . . 250 262
7.75%, 1/31/00. . . . . . . . . . . . . . . . 500 521
9.125%, 5/15/99 . . . . . . . . . . . . . . . 25 27
1,937
Total U.S. Government Obligations (Cost $1,980) 1,967
U.S. Government Mortgage-Backed Securities - 21.4%
U.S. Government Agency Obligations - 17.0%
Federal Home Loan Mortgage
5 year balloon, 6.00%, 4/1/99 . . . . . . . . 43 42
REMIC
5.40%, 10/15/12 . . . . . . . . . . . . . . 200 196
5.50%, 6/15/13. . . . . . . . . . . . . . . 250 247
7.50%, 2/15/06. . . . . . . . . . . . . . . 75 76
8.25%, 7/15/12. . . . . . . . . . . . . . . 20 21
Federal National Mortgage Assn.
7.00%, 4/1/09 . . . . . . . . . . . . . . . 522 517
REMIC
5.35%, 9/25/02. . . . . . . . . . . . . . . 250 245
7.50%, 8/25/05. . . . . . . . . . . . . . . 53 53
1,397
U.S. Government Guaranteed Obligations - 4.4%
Government National Mortgage Assn.
I, 10.00%, 11/15/09 - 4/15/19 . . . . . . . . 141 154
Midget, I
10.00%, 11/15/00 - 2/15/01. . . . . . . . . 109 115
10.50%, 4/15/98 - 6/15/99 . . . . . . . . . 88 93
362
Total U.S. Government Mortgage-Backed Securities
(Cost $1,761) 1,759
Asset-Backed Securities - 3.7%
Credit Card-Backed - 3.7%
American Express Master Trust, 7.15%, 8/15/99 . $ 50 $ 51
Banc One Credit Card Master Trust,
7.80%, 12/15/00 . . . . . . . . . . . . . . . 100 103
First Deposit Master Trust, 6.05%, 8/15/02. . . 100 99
Signet Credit Card Master Trust, 5.20%, 2/15/02 50 49
Total Asset-Backed Securities (Cost $308) 302
Municipal Bonds - 0.8%
Taxable Municipal - 0.8%
University of Miami, GO, 6.90%, 4/1/04. . . . . 75 72
Total Municipal Bonds (Cost $75) 72
Commercial Paper - 11.2%
Barnett Banks, 5.40%, 7/1/96. . . . . . . . . . 200 200
Investments in Commercial Paper through a
joint account, 5.49-5.68%, 7/1/96 . . . . . . 717 717
Total Commercial Paper (Cost $917) 917
Total Investments in Securities -
98.5% of Net Assets (Cost $8,142). . . . . . . . 8,083
Other Assets Less Liabilities. . . . . . . . . . 120
NET ASSETS . . . . . . . . . . . . . . . . . . . $ 8,203
Net Assets Consist of:
Accumulated net investment income -
net of distributions. . . . . . . . . . . . . . $ (14)
Accumulated net realized gain/loss -
net of distributions. . . . . . . . . . . . . . (69)
Net unrealized gain (loss) . . . . . . . . . . . (59)
Paid-in-capital applicable to 1,678,032 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares of the Corporation
authorized. . . . . . . . . . . . . . . . . . . 8,345
NET ASSETS . . . . . . . . . . . . . . . . . . . $ 8,203
NET ASSET VALUE PER SHARE. . . . . . . . . . . . $ 4.89
! Private Placement
* Non-income producing
# Securities contain some restrictions as to public resale.
GO General Obligation
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts
to 2.15% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Limited-Term Bond Portfolio / Six Months Ended June 30, 1996
(Unaudited)
(in thousands)
INVESTMENT INCOME
Interest income. . . . . . . . . . . . . . . . . . . . . . . $ 193
Investment management and administrative expenses. . . . . . 21
_________
Net investment income. . . . . . . . . . . . . . . . . . . . 172
_________
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities . . . . . . . . . . . (69)
Change in net unrealized gain or loss on securities. . . . . (113)
_________
Net realized and unrealized gain (loss). . . . . . . . . . . (182)
_________
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS. . . . . . $ (10)
_________
_________
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Limited-Term Bond Portfolio (Unaudited)
(in thousands)
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
________________ __________________
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income. . . . . . . . . $ 172 $ 165
Net realized gain (loss) . . . . . . . (69) (5)
Change in net unrealized gain or loss. (113) 79
__________ __________
Increase (decrease) in net
assets from operations . . . . . . . (10) 239
__________ __________
Distributions to shareholders
Net investment income. . . . . . . . . (172) (165)
__________ __________
Capital share transactions*
Shares sold. . . . . . . . . . . . . . 6,349 2,070
Distributions reinvested . . . . . . . 171 165
Shares redeemed. . . . . . . . . . . . (2,101) (424)
__________ __________
Increase (decrease) in net assets
from capital share transactions. . . 4,419 1,811
__________ __________
NET ASSETS
Increase (decrease) during period. . . . 4,237 1,885
Beginning of period. . . . . . . . . . . 3,966 2,081
__________ __________
End of period. . . . . . . . . . . . . . $ 8,203 $ 3,966
__________ __________
__________ __________
*Share information
Shares sold. . . . . . . . . . . . . . 1,283 413
Distributions reinvested . . . . . . . 34 33
Shares redeemed. . . . . . . . . . . . (424) (85)
__________ __________
Increase (decrease) in
shares outstanding . . . . . . . . . 893 361
__________ __________
__________ __________
The accompanying notes are an integral part of these financial statements.
Notes To Financial Statements
T. Rowe Price Limited-Term Bond Portfolio / June 30, 1996 (Unaudited)
Note 1 - Significant Accounting Policies
T. Rowe Price Fixed Income Series, Inc., (the corporation) is registered under
the Investment Company Act of 1940. The Limited-Term Bond Portfolio (the
fund), a diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on May 13,
1994. The shares of the fund are currently being offered only to separate
accounts of certain insurance companies as an investment medium for both
variable annuity contracts and variable life insurance policies.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with 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 original 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. Warrants are valued at the last bid
price.
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 Directors.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities, are amortized for both financial reporting and tax
purposes. Premiums and discounts on mortgage-backed securities are recognized
upon principal repayment as gain or loss for financial reporting purposes and
as ordinary income for tax purposes.
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 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
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $3,337,000 and $1,230,000,
respectively, for the six months ended June 30, 1996. Purchases and sales of
U.S. government securities aggregated $4,206,000 and $2,258,000, respectively,
for the six months ended June 30, 1996.
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.
At June 30, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $8,142,000, and net unrealized loss
aggregated $59,000, of which $12,000 related to appreciated investments and
$71,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management and administrative agreement between the fund and T.
Rowe Price Associates, Inc. provides for an all-inclusive annual fee, computed
daily and paid monthly, equal to 0.70% of the fund's average daily net assets.
Pursuant to the agreement, investment management, shareholder servicing,
transfer agency, accounting, and custody services are provided to the fund,
and interest, taxes, brokerage commissions, and extraordinary expenses are
paid directly by the fund.
Financial Highlights
T. Rowe Price Limited-Term Bond Portfolio (Unaudited)
For a share outstanding throughout each period
__________________________________________
Six Months Year May 13, 1994
Ended Ended to
June 30, 1996 Dec. 31, 1995 Dec. 31, 1994
____________ ____________ ____________
NET ASSET VALUE,
BEGINNING OF PERIOD. . . . . . $ 5.06 $ 4.92 $5.00
______ ______ ______
Investment activities
Net investment income. . . . . 0.14 0.33 0.21
Net realized and
unrealized gain (loss) . . . (0.17) 0.14 (0.08)
______ ______ ______
Total from investment
activities . . . . . . . . . (0.03) 0.47 0.13
______ ______ ______
Distributions
Net investment income. . . . (0.14) (0.33) (0.21)
______ ______ ______
NET ASSET VALUE,
END OF PERIOD. . . . . . . . . $4.89 $5.06 4.92
______ ______ ______
______ ______ ______
RATIOS / SUPPLEMENTAL DATA
Total return . . . . . . . . . (0.54)% 9.88% 2.62%
Ratio of expenses to
average net assets . . . . . . 0.70%! 0.70% 0.70%!
Ratio of net investment income
to average net assets. . . . . 5.81%! 6.60% 6.63%!
Portfolio turnover rate. . . . 132.7%! 73.7% 146.0%!
Net assets,
end of period (in thousands) . $8,203 $3,966 $2,081
! Annualized.
Chart 1 - Yield Comparison: a 4-line chart showing interest rate levels on the
current coupon GNMA, 5-year treasury note, 2-year treasury note, and fed funds
rate from 6/30/95 through 6/30/96.
Chart 2 - SEC Performance Comparison showing the cumulative growth of $10,000
invested in the Limited-Term Bond Portfolio from inception (5/13/94) compared
with $10,000 invested in a broad-based index over the same period.
