With the Financial Stability Oversight Council having taken up money market reform, it's growing increasingly likely that money funds will get a floating NAV -- and so firms have been been trying to get out ahead of this change by launching short-term bond funds as higher-yielding money fund alternatives.

T. Rowe Price [profile] is the latest firm to expand its short-term bond lineup. Today, the firm announced in a press release the launch of the Ultra Short-Term Bond Fund, designed to "fill the gap between money market funds and traditional short-term bond funds in terms of risk/reward tradeoff."

Now T. Rowe offers three short-term bond funds: the Prime Reserve money market fund, this new ultra short-term fund, and the Short-Term Bond Fund. The new fund's expense ratio will be lower than either of the other two funds', 35 basis points compared to 53 BPS on the short-term bond fund and 56 BPS on the money market fund.

The fund will be managed by Joseph Lynagh, who also manages the firm's money market fund, and who explains the new fund's approach in a video interview on the T. Rowe website.

Lynagh told MFWire that the new fund "fits between our money market fund and our short-term bond fund," and is a "hybrid" of those two, with money fund-like features such as check-writing privileges and no trading restrictions.

He said that while this new fund was not launched in response to the possibility of new money fund regulations, it was in part a response to the likelihood of low interest rates for the next few years.

"If you look at the Fed's own statements, we're talking three years of possibly being anchored to very low money market yields. So this fund offers more yield than a money fund, with less price risk than a longer-term bond fund." said Lynagh. "The intent is for this to be a low-risk alternative to a cash-like product, so we wanted to add popular cash-like features."

The press release from T. Rowe is below.

T. Rowe Price Launches Ultra Short-Term Bond Fund

New Fund Provides Investors with Alternative Short-Term Investment Vehicle

BALTIMORE, Dec. 5, 2012 /PRNewswire/ -- T. Rowe Price (TROW) has introduced the Ultra Short-Term Bond Fund(TRBUX) for investors. The new no-load mutual fund seeks to provide a high level of income consistent with minimal fluctuations in principal value and liquidity.  The Ultra Short-Term Bond Fund offers a conservative investment alternative for investors who want higher yields than a money market fund and less volatility than short-term bond funds. 

Ultra Short-Term Bond Fund Details

The Ultra Short-Term Bond Fund fills the gap between money market funds and traditional short-term bond funds in terms of a risk/reward tradeoff.

The fund takes on slightly more credit and interest rate risk than money market funds with greater return potential. Unlike money market funds but similar to other bond funds, its net asset value can increase or decrease as interest rates change, with the potential for principal gains or losses. At the same time, the fund will be managed with an eye toward reducing risks if rates rise.

The Ultra Short-Term Bond Fund will invest in a highly diversified portfolio of shorter-term investment-grade corporate and government securities, including mortgage- and asset-backed securities, money market securities, and bank obligations.

The new fund will invest in securities with an approximate average maturity of 1.5 years or less, with a broader credit spectrum that includes any investment-grade security rated BBB or better. By contrast, most money market fund investments tend to have average maturities of three months or less and are typically rated AA or better.

The bond fund will offer similar flexibility to the firm's money market products, allowing for check writing capabilities and no trading restrictions.

The fund is managed by Joseph K. Lynagh, who currently manages the firm's taxable and municipal money market portfolios and other cash investments.  Mr. Lynagh has 18 years of investment experience, all of which have been with T. Rowe Price.

Mr. Lynagh discusses his fund approach in this video.

The net expense ratio for the fund is estimated to be 0.35%.

The minimum initial investment in the Ultra Short-Term Bond Fund is $2,500 or $1,000 for retirement plans or gifts or transfers to minors (UGMA/UTMA) accounts.

Quote

Joseph K. Lynagh, Portfolio Manager

 "Given the current interest rate environment, this new fund is attractive for investors who want to take on more risk for potentially greater yields, while still providing a relatively safe place for cash investments. It may also be useful for those who are invested in bond funds with longer maturities but want to reduce the potential principal risk from rising interest rates."

Investors can download a prospectus or obtain one by calling 1-800-541-8803. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.  Advisors can learn more by calling 1-800-564-6958.

T. Rowe Price Investment Services, Inc., Distributor, T. Rowe Price mutual funds.

Investments in money market funds are not insured or guaranteed by the FDIC or any other government agency. Although the funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in them.

About T. Rowe Price

Founded in 1937, Baltimore-based T. Rowe Price is a global investment management organization with $574.4 billion in assets under management as of September 30, 2012.  The organization provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.  The company also offers a variety of sophisticated investment planningand guidance tools.  T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.

  

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