UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF
REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-2396
| T. Rowe Price New Income Fund, Inc. |
|
|
| (Exact name of registrant as specified in charter) |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Address of principal executive offices) |
| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Name and address of agent for service) |
Registrant’s telephone number, including area
code: (410) 345-2000
Date of fiscal year end: May
31
Date of reporting period: February 29, 2012
Item 1. Schedule of Investments
 |
|
New
Income Fund |
February
29,
2012 |
| T. ROWE PRICE NEW INCOME FUND |
|
Unaudited |
The accompanying notes are an integral part of this Portfolio of Investments.
T. Rowe Price New Income
Fund
Unaudited
Notes To Portfolio of Investments
T. Rowe Price New Income Fund, Inc. (the fund), is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks the highest level of income consistent with the preservation of capital over time by investing primarily in marketable debt securities.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of
Preparation
The accompanying
Portfolio of Investments was prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP), which require the use
of estimates made by management. Management believes that estimates and
valuations are appropriate; however, actual results may differ from those
estimates, and the valuations reflected in the Portfolio of Investments may
differ from the values ultimately realized upon sale or maturity.
Investment
Transactions
Investment transactions
are accounted for on the trade date.
Currency
Translation
Assets, including
investments, and liabilities denominated in foreign currencies are translated
into U.S. dollar values each day at the prevailing exchange rate, using the mean
of the bid and asked prices of such currencies against U.S. dollars as quoted by
a major bank. Purchases and sales of securities are translated into U.S. dollars
at the prevailing exchange rate on the date of the transaction.
New Accounting Pronouncements
In December 2011, the Financial
Accounting Standards Board issued amended guidance to enhance disclosure for
offsetting assets and liabilities. The guidance is effective for fiscal years
and interim periods beginning on or after January 1, 2013; adoption will have no
effect on the fund’s net assets or results of operations.
NOTE 2 – VALUATION
The fund’s financial instruments are reported at fair value as defined by GAAP. The fund values its investments and computes its net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business.
Valuation
Methods
Debt securities are generally
traded in the over-the-counter (OTC) market. Securities with remaining
maturities of one year or more at the time of acquisition are valued at prices
furnished by dealers who make markets in such securities or by an independent
pricing service, which considers the 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 at the time of acquisition
generally use amortized cost in local
currency to approximate fair value. However, if amortized cost is deemed not to
reflect fair value or the fund holds a significant amount of such securities
with remaining maturities of more than 60 days, the securities are valued at
prices furnished by dealers who make markets in such securities or by an
independent pricing service.
Investments in mutual funds are valued at the mutual fund’s closing net asset value per share on the day of valuation. Investments in private investment companies are valued at the entity’s net asset value (or equivalent) as of the valuation date. Forward currency exchange contracts are valued using the prevailing forward exchange rate. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service.
Other investments, including restricted securities and private placements, and those 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 the T. Rowe Price Valuation Committee, established by the fund’s Board of Directors (the Board). Subject to oversight by the Board, the Valuation Committee develops pricing-related policies and procedures and approves all fair-value determinations. The Valuation Committee regularly makes good faith judgments, using a wide variety of sources and information, to establish and adjust valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of private-equity instruments, the Valuation Committee considers a variety of factors, including the company’s business prospects, its financial performance, strategic events impacting the company, relevant valuations of similar companies, new rounds of financing, and any negotiated transactions of significant size between other investors in the company. Because any fair-value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions.
Valuation
Inputs
Various inputs are used to
determine the value of the fund’s financial instruments. These inputs are
summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar financial instruments, interest rates, prepayment speeds, and credit risk)
Level 3 – unobservable inputs
Observable inputs are those based on market data obtained from sources independent of the fund, and unobservable inputs reflect the fund’s own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level. The following table summarizes the fund’s financial instruments, based on the inputs used to determine their values on February 29, 2012:
Following is a reconciliation of the fund’s Level 3 holdings for the nine-months ended February 29, 2012. Gain (loss) reflects both realized and change in unrealized gain (loss) on Level 3 holdings during the period, if any. The change in unrealized gain (loss) on Level 3 instruments held at February 29, 2012, totaled $(64,000) for the nine-months ended February 29, 2012.
NOTE 3 - DERIVATIVE INSTRUMENTS
The fund may invest in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. Investments in derivatives can magnify returns positively or negatively; however, the fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover the settlement obligations under its open derivative contracts.
The fund values its derivatives at fair value, as described below and in Note 2, and recognizes changes in fair value currently in its results of operations. Accordingly, the fund does not follow hedge accounting, even for derivatives employed as economic hedges. The fund does not offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral.
Forward Currency Exchange
Contracts
The fund uses forward
currency exchange contracts (forwards) primarily to protect its non-U.S.
dollar-denominated securities from adverse currency movements relative to the
U.S. dollar. A forward involves an obligation to purchase or sell a fixed amount
of a specific currency on a future date at a price set at the time of the
contract. Although certain forwards may be settled by exchanging only the net
gain or loss on the contract, most forwards are settled with the exchange of the
underlying currencies in accordance with the specified terms. Forwards are
valued at the unrealized gain or loss on the contract, which reflects the net
amount the fund either is entitled to receive or obligated to deliver, as
measured by the difference between the forward exchange rates at the date of
entry into the contract and the forward rates at the reporting date. Risks
related to the use of forwards include the possible failure of counterparties to
meet the terms of the agreements; that anticipated currency movements will not
occur thereby reducing the fund’s total return; and the potential for losses in
excess of the fund’s initial investment.
Credit Default
Swaps
The fund may use swaps in an
effort to manage exposure to changes in interest rates, inflation rates, and
credit quality; to adjust overall exposure to certain markets; to enhance total
return or protect the value of portfolio securities; to serve as a cash
management tool; and/or to adjust portfolio duration or credit exposure. Credit
default swaps are agreements where one party (the protection buyer) agrees to
make periodic payments to another party (the protection seller) in exchange for
protection against specified credit events, such as certain defaults and
bankruptcies related to an underlying credit instrument, or issuer or index of
such instruments. Upon occurrence of a specified credit event, the protection
seller is required to pay the buyer the difference between the notional amount
of the swap and the value of the underlying credit, either in the form of a net
cash settlement or by paying the gross notional amount and accepting delivery of
the relevant underlying credit. For credit default swaps where the underlying
credit is an index, a specified credit event may affect all or individual
underlying securities included in the index and will be settled based upon the
relative weighting of the affected underlying security(s) within the index.
Generally, the payment risk for the seller of protection is inversely related to
the current market price of the underlying credit or, in the case of an index
swap, the market value of the contract relative to the notional amount.
Therefore, the payment risk increases as the price of the relevant underlying
credit, or market value of the index swap, declines due to market valuations of
credit quality. The notional amount of protection sold by the fund reflects the
maximum potential amount the fund could be required to pay under such contracts.
The value of a swap included in net assets is the unrealized gain or loss on the
contract plus or minus any unamortized premiums paid or received, respectively.
Risks related to the use of credit default swaps include the possible inability
of the fund to accurately assess the current and future creditworthiness of
underlying issuers, the possible failure of a counterparty to perform in
accordance with the terms of the swap agreements, potential government
regulation that could adversely affect the fund’s swap investments, and
potential losses in excess of the fund’s initial investment.
NOTE 4 – OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Restricted
Securities
The fund may invest in
securities that are subject to legal or contractual restrictions on resale.
Prompt sale of such securities at an acceptable price may be difficult and may
involve substantial delays and additional costs.
TBA Purchase and Sale
Commitments
The fund may enter into
“to be announced” (TBA) purchase and/or sale commitments, pursuant to which it
agrees to purchase or sell, respectively, mortgage-backed securities for a fixed
unit price, with payment and delivery at a scheduled future date beyond the
customary settlement period for such mortgage-backed securities. With TBA
transactions, the particular securities to be delivered are not identified at
trade date; however, delivered securities must meet specified terms, including
issuer, rate and mortgage term, and be within industry-accepted “good delivery”
standards. The fund generally enters into TBA purchase transactions with the
intention of taking possession of the underlying mortgage securities; however,
for either purchase or sale transactions, the fund also may extend the
settlement by “rolling” the transaction. Until settlement, the fund maintains
cash reserves and liquid assets sufficient to settle its TBA commitments.
Securities
Lending
The fund lends its securities
to approved brokers to earn additional income. It receives as collateral cash
and U.S. government securities valued at 102% to 105% of the value of the
securities on loan. Collateral is maintained over the life of the loan in an
amount not less than the value of loaned securities as determined at the close
of fund business each day; any adjustments to collateral balances resulting from
changes in security values are settled the next business day. Cash collateral is
invested by the fund’s lending agent(s) in accordance with investment guidelines
approved by management. Although 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 the securities or if collateral
investments decline in value. In accordance with GAAP, investments made with
cash collateral are reflected in the accompanying portfolio of investments, but
collateral received in the form of securities are not. On February 29, 2012, the
value of cash collateral investments was $463,110,000, and the value of loaned
securities was $449,298,000, including securities sold but not yet settled,
which are not reflected in the accompanying portfolio of investments.
T. Rowe Price Term Asset-Backed
Opportunity Fund, L.L.C.
At February 29, 2012, the fund was
invested in the T. Rowe Price Term Asset-Backed Opportunity Fund, L.L.C.
(private fund), a private investment company managed by T. Rowe Price
Associates, Inc. that participates in the Term Asset-Backed Securities Loan
Facility (TALF) program created and administered by the Federal Reserve Bank of
New York (FRBNY). The TALF program provided eligible borrowers with term loans
secured by eligible asset-backed securities and/or commercial mortgage-backed
securities, which were either owned by the borrower or purchased by the borrower
and subsequently pledged as collateral for a TALF loan. TALF loans generally are
nonrecourse in nature. The private fund is treated as a partnership for federal
income tax purposes. It has a limited life extending five years from the date on
which the TALF program closed for any new loans, which was June 30, 2010. The
private fund can have two possible extensions (one year each) with the consent
of a majority of its investors. Invested capital generally will be returned to
investors as underlying securities are liquidated and the TALF loans are repaid
or mature, with the balance paid at maturity of the private fund. Ownership
interests in the private fund may not be redeemed, sold, or assigned. As of
February 29, 2012, outstanding capital commitments may no longer be called by
the private fund.
Counterparty Risk and Collateral
The fund has entered into collateral
agreements with certain counterparties to mitigate counterparty risk associated
with certain over-the-counter (OTC) financial instruments, including swaps,
forward currency exchange contracts, TBA purchase commitments, and OTC options
(collectively, covered OTC instruments). Subject to certain minimum exposure
requirements (which typically range from $100,000 to $500,000), collateral
requirements generally are determined and transfers made based on the net
aggregate unrealized gain or loss on all covered OTC instruments covered by a
particular collateral agreement with a specified counterparty. Collateral, both
pledged by the fund to a counterparty and pledged by a counterparty to the fund,
is held in a segregated account by a third-party agent and can be in the form of
cash or debt securities issued by the U.S. government or related agencies.
Securities posted as collateral by the fund to a counterparty are so noted in
the accompanying Portfolio of Investments and remain in the fund’s net assets.
As of February 29, 2012, securities valued at $14,263,000 had been posted by the
fund to counterparties. In accordance with GAAP, cash pledged by counterparties
to the fund is included in the fund’s net assets;
however, securities pledged by counterparties to the fund are not recorded by
the fund. As of February 29, 2012, collateral pledged by counterparties to the
fund consisted of $153,000 cash and securities valued at $8,070,000.
At any point in time, the fund’s risk of loss from counterparty credit risk on covered OTC instruments is the aggregate unrealized gain on appreciated covered OTC instruments in excess of collateral, if any, pledged by the counterparty to the fund. In accordance with the terms of the relevant derivatives agreements, counterparties to OTC derivatives may be able to terminate derivative contracts prior to maturity after the occurrence of certain stated events, such as a decline in net assets above a certain percentage or a failure by the fund to perform its obligations under the contract. Upon termination, all transactions would typically be liquidated and a net amount would be owed by or payable to the fund.
NOTE 5 - FEDERAL INCOME TAXES
At February 29, 2012, the cost of investments for federal income tax purposes was $17,384,966,000. Net unrealized gain aggregated $775,695,000 at period-end, of which $820,511,000 related to appreciated investments and $44,816,000 related to depreciated investments.
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. (Price Associates) and considered affiliates of the fund. The T. Rowe Price Reserve Investment Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates and are not available for direct purchase by members of the public. The T. Rowe Price Reserve Investment Funds pay no investment management fees.
The fund may also invest in certain T. Rowe Price institutional funds (underlying institutional funds) as a means of gaining efficient and cost-effective exposure to certain markets. The underlying institutional funds are open-end management investment companies managed by Price Associates and are considered affiliates of the fund. Each underlying institutional fund pays an all-inclusive management and administrative fee to Price Associates. To ensure that the fund does not incur duplicate fees, Price Associates has agreed to permanently waive a portion of its management fee charged to the fund in an amount sufficient to fully offset the management fees paid by the underlying institutional funds related to fund assets invested therein.
Item 2. Controls and Procedures.
(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-Q was recorded, processed, summarized, and reported timely.
(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 3. Exhibits.
Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price New Income Fund, Inc.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date April 25, 2012 | ||
Pursuant to the
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date April 25, 2012 | ||
| By | /s/ Gregory K. Hinkle | |
| Gregory K. Hinkle | ||
| Principal Financial Officer | ||
| Date April 25, 2012 | ||