T. Rowe Price Institutional Long Duration Credit Fund

Transcription

1 November 30, 2017 Semiannual Report T. Rowe Price Institutional Long Duration Credit Fund

2 Highlights Stronger corporate earnings, synchronized global growth, and positive momentum for corporate tax reform helped support demand for investment-grade corporate bonds during the six-month period. The Institutional Long Duration Credit Fund underperformed the Bloomberg Barclays U.S. Long Credit Bond Index during the reporting period, primarily as a result our yield curve positioning and industry allocation. Our underweight to the noncorporate space, comprising bonds issued by municipalities, government organizations, sovereigns, and supranationals, detracted from relative results. These assets, especially riskier sovereign-owned energy names, outperformed amid stabilizing oil prices. While there could be headwinds for investment-grade corporate bonds in 2018, the fundamental backdrop remains supportive, especially as corporate earnings remain strong and continue to improve. The views and opinions in this report were current as of November 30, They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.

3 Manager s Letter T. Rowe Price Institutional Long Duration Credit Fund Dear Investor Stronger corporate earnings, synchronized global growth, and positive momentum for corporate tax reform helped support demand for investment-grade corporate bonds during the six-month reporting period. Even so, your fund underperformed the benchmark as a result of our more conservative industry allocation decisions and yield curve positioning. Performance Performance Comparison Six-Month Period Ended 11/30/17 Total Return Institutional Long Duration Credit Fund 3.83% Bloomberg Barclays U.S. Long Credit Bond Index 4.38 During the six-month period ended November 30, 2017, the fund returned 3.83% compared with 4.38% for the Bloomberg Barclays U.S. Long Credit Bond Index. The fund s share price rose during the six-month reporting period to $10.73 from $10.52 at the end of May. Dividend income totaled $0.19 per share over the past six months. The fund s 30-day SEC yield fell to 3.48% from 3.64% at the end of May. Portfolio Characteristics Periods Ended 5/31/17 11/30/17 Price Per Share $10.52 $10.73 Dividends Per Share For 6 Months For 12 Months SEC Yield (30-day) 3.64% 3.48% Weighted Average Maturity (years) Weighted Average Effective Duration (years) month dividends may not equal the combined 6-month figures due to rounding. Economy and Interest Rates Interest Rate Levels 8% Year Treasury Bond Bloomberg Barclays U.S. Long Credit Bond Index 0 11/30/16 2/17 5/17 8/17 11/30/17 Sources: Bloomberg Barclays and the Federal Reserve Board. The U.S. economy grew at an annualized pace of 3.3% in the third quarter of 2017 and is on track to expand about 2% for the full year. The solid growth combined with strong employment and signs that inflation may have bottomed prompted the Federal Reserve to continue its gradual tightening plans with a quarterpoint increase in the federal funds target rate last summer. (On December 13, soon after our reporting period ended, the central bank raised rates by another quarter point, bringing the fed funds target rate to the 1.25% to 1.50% range.) The central bank indicated that three more rate hikes would likely follow in The Fed began to slowly unwind its $4.5 trillion balance sheet that it built up as part of its quantitative easing measures following the 2008 financial crisis. In Europe, sustained economic growth and gradually accelerating inflation have convinced the European Central Bank (ECB) to slowly normalize monetary policy. While European political risks eased in the aftermath of various national elections, uncertainty surrounded the effects of Brexit and Spain s Catalonia secessionist vote. In the investment-grade corporate bond market, companies issued investment-grade debt at a brisk pace to take advantage of low rates. Strong demand from foreign buyers looking for higher yields helped absorb the supply and pushed bond prices higher. While expectations of accelerating inflation and stronger growth under the Trump administration supported the investment-grade corporate market, each delay in implementing proposed fiscal and tax policies chipped away at expectations for this growth. 1

4 Corporate bonds outperformed U.S. Treasuries with similar maturities as credit spreads compressed significantly. The Treasury yield curve, especially between 2- and 10-year notes, flattened as short-term rates increased more than longer-term yields. The yield on the two-year Treasury note began the period at 1.28% and rose to 1.78%, while the yield on the 10-year Treasury began the period at 2.21% and rose to 2.42%. (Bond prices and yields move in opposite directions.) Portfolio Review Quality Diversification BB Rated 3% BBB Rated 64% A Rated and Above 33% Industry Diversification Percent of Net Assets 5/31/17 11/30/17 U.S. Corporate Investment Grade 77.7% 75.7% Non-U.S. Developed Market Debt (Nonsovereign) U.S. Corporate High Yield Emerging Market Corporates Taxable Municipal Non-U.S. Corporate High Yield U.S. Government Reserves Total 100.0% 100.0% Historical weightings reflect current industry/sector classifications. Industry positioning and security selection weighed on relative returns. Our underweight to bonds issued by municipalities, government organizations, sovereigns, and supranationals detracted from relative results, especially as these riskier, sovereign-owned energy names outperformed amid stabilizing oil prices. However, we opted not to buy emerging market sovereign bonds and the state-owned oil companies, which became top benchmark performers during the period. Rather, we added to higher-quality energy names such as Marathon Oil, which became a top absolute contributor. (Please refer to the fund s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) Based on net assets as of 11/30/17. Sources: Credit Quality Ratings are obtained using Bloomberg Barclays methodology using ratings derived from Moody s Investors Service (Moody s), Standard & Poor's (S&P), and Fitch Ratings (Fitch). When ratings from all 3 agencies are available, the median rating is used. When ratings are available from 2 of the agencies, the lower rating is used. When 1 rating is available, that rating is used. T. Rowe Price does not evaluate these ratings but simply assigns them to the appropriate credit quality category as determined by the rating agency. T. Rowe Price uses the rating of the underlying investment vehicle for credit default swaps. Unrated securities totaled 0.02% of the portfolio at the end of the reporting period. While our underweight to the media industry benefited results, our selection of securities, especially Charter Communications and Time Warner Cable, weighed on relative performance as delayed government approval of proposed mergers created uncertainty. The fund benefited from security selection in the electric utilities sector. We like longer-dated utility debt, and the stable cash flows from contractual obligations have helped company results. Southern Company, a gas and electric utility holding company, boosted relative returns after its subsidiary, Georgia Power, received its first installment of Toshiba s $3.8 billion in financial assistance for the development of two nuclear reactors at its Vogtle power plant in Georgia. State regulators had conditioned the continuation of this costly project on Southern Company s receipt of Toshiba s payment. Our security selection in the insurance industry contributed to relative returns because of the group s strong fundamentals and a supportive regulatory environment. We favored property and casualty (P&C) names over health insurers, which were pressured by the uncertainty about the future of the Affordable Care Act. P&C holdings benefited from years of low levels of catastrophic losses, which enabled them to build up capital reserves. Many of these bonds have longer 2

5 Outlook maturities, which held up better than shorter-maturity assets as the yield curve flattened. Health insurers Anthem and Humana were top relative and absolute contributors. While we initiated the Anthem position during the period, we sold Humana. P&C company Liberty Mutual Group was another top absolute and relative performer. Our yield curve positioning detracted from relative results. The portfolio was overweight issues in the 5- to 10-year part of the yield curve. This positioning detracted from performance as intermediate-term rates rose. On November 30, 2017, the portfolio s duration was 13.9 years, roughly in line with that of the benchmark. We were able to take advantage of many positive trends in the reporting period, including the rally in financialand insurance-related names driven by hopes for deregulation. Many of these opportunities have now run their course as spreads have contracted, volatility ebbed, and oil prices stabilized. We believe that the U.S. economic expansion is in its later stages; however, tax cuts enacted by Congress may prolong it. While we have seen record-high levels of issuance, tax cuts and other provisions of the new tax measure may result in less issuance of corporate debt. The fundamental backdrop remains supportive for investment-grade corporate bonds, especially as corporate earnings continue to improve. Demand for investment-grade debt remains strong in a yield-hungry world, and investors have been more willing to add risk to achieve higher returns. Global growth remains steady and inflation subdued. However, global macroeconomic events, including commodity price volatility, could affect performance. Likewise, the escalation of tensions with North Korea is another risk. As such, we will closely monitor global economic and political conditions and be cautious around new bouts of risk taking. In keeping with our long-term strategy, we will seek lower investment-grade-rated, asset-rich companies that provide the portfolio with a notable yield and spread advantage over the benchmark and that we believe can be significant drivers of relative returns. We remain committed to a risk-aware, fundamentals-based investment approach and long-term perspective. Thank you for investing with T. Rowe Price. Respectfully submitted, David A. Tiberii, CFA Chairman of the fund s Investment Advisory Committee December 22, 2017 The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund s investment program. 3

6 T. Rowe Price Institutional Long Duration Credit Fund Supplement to Summary Prospectus dated October 1, 2017 On page 6, the portfolio manager table under Management is supplemented as follows: Effective January 31, 2018, Robert M. Larkins will join David A. Tiberii as the fund s co-portfolio manager and Cochairman of the fund s Investment Advisory Committee. Mr. Larkins joined T. Rowe Price in Effective June 30, 2018, Mr. Tiberii will step down from his responsibilities as coportfolio manager and Cochairman of the fund s Investment Advisory Committee and Mr. Larkins will become the fund s sole portfolio manager and sole Chairman of the fund s Investment Advisory Committee. Mr. Tiberii plans to retire from T. Rowe Price during the third quarter of The date of this supplement is January 11, E S 1/11/2018 4

7 Risks of Fixed Income Investing Bonds are subject to interest rate risk (the decline in bond prices that usually accompanies a rise in interest rates) and credit risk (the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default by failing to make timely payments of interest or principal), potentially reducing the fund s income level and share price. High yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments. Glossary Bloomberg Barclays U.S. Long Credit Bond Index: A measure of corporate fixed income securities that are primarily rated investment grade (Baa by Moody s Investors Service and BBB by Standard & Poor s). Credit spreads: The additional yield that investors demand to hold a bond with credit risk compared with a Treasury security with a comparable maturity date. Duration: A measure of a bond fund s sensitivity to changes in interest rates. For example, a fund with a duration of six years would fall about 6% in price in response to a one-percentage-point rise in interest rates, and vice versa. Fed funds rate: The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The Federal Reserve sets a target federal funds rate to affect the direction of interest rates. Glossary (continued) SEC yield (30-day): A method of calculating a fund s yield that assumes all portfolio securities are held until maturity. Yield will vary and is not guaranteed. Weighted average maturity: A measure of a fund s interest rate sensitivity. In general, the longer the average maturity, the greater the fund s sensitivity to interest rate changes. The weighted average maturity may take into account the interest rate readjustment dates for certain securities. Yield curve: A graphic depiction of the relationship between yields and maturity dates for a set of similar securities. A security with a longer maturity usually has a higher yield. If a short-term security offers a higher yield, then the curve is said to be inverted. If shortand long-term bonds are offering equivalent yields, then the curve is said to be flat. Note: Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission. 5

8 Performance and Expenses T. Rowe Price Institutional Long Duration Credit Fund Growth of $1 Million This chart shows the value of a hypothetical $1 million investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes. Institutional Long Duration Credit Fund $1,500,000 1,400,000 1,300,000 1,200,000 1,100,000 1,000,000 6/3/13 11/13 Institutional Long Duration Credit Fund Bloomberg Barclays U.S. Long Credit Bond Index 11/14 11/15 As of 11/30/17 $1,280,227 $1,293,019 11/16 Average Annual Compound Total Return 11/17 Since Inception Periods Ended 11/30/17 One Year 6/3/13 Institutional Long Duration Credit Fund 10.16% 5.65% 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. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results. Fund Expense Example As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Actual Expenses The first line of the following table (Actual) provides information about actual account values and actual expenses. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading Expenses Paid During Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table (Hypothetical) is based on hypothetical account values and expenses derived from the fund s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. Institutional Long Duration Credit Fund Expenses Beginning Ending Paid During Account Account Period* Value Value 6/1/17 to 6/1/17 11/30/17 11/30/17 Actual $1, $1, $2.30 Hypothetical (assumes 5% return before expenses) 1, , *Expenses are equal to the fund s annualized expense ratio for the 6-month period (0.45%), multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (183), and divided by the days in the year (365) to reflect the half-year period. 6

9 Quarter-End Returns Since Inception Periods Ended 9/30/17 One Year 6/3/13 Institutional Long Duration Credit Fund 1.43% 5.62% Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. For the most recent month-end performance, please contact a T. Rowe Price representative at This table provides returns through the most recent calendar quarter-end rather than through the end of the fund s fiscal period. It 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. Average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. When assessing performance, investors should consider both short- and long-term returns. Expense Ratio Institutional Long Duration Credit Fund 0.45% The expense ratio shown is as of the fund s fiscal year ended 5/31/17. This number may vary from the expense ratio shown elsewhere in this report because it is based on a different time period and, if applicable, includes acquired fund fees and expenses but does not include fee or expense waivers. 7

10 Financial Highlights T. Rowe Price Institutional Long Duration Credit Fund (Unaudited) For a share outstanding throughout each period 6 Months Ended 11/30/17 Year Ended 5/31/17 5/31/16 5/31/15 6/3/13 (1) Through 5/31/14 NET ASSET VALUE Beginning of period $ $ $ $ $ Investment activities Net investment income (2) Net realized and unrealized gain / loss (3) 0.32 Total from investment activities Distributions Net investment income (0.19) (0.38) (0.40) (0.41) (0.37) Net realized gain (0.06) Total distributions (0.19) (0.38) (0.46) (0.41) (0.37) NET ASSET VALUE End of period $ $ $ $ $ Ratios/Supplemental Data Total return (4) 3.83% 4.48% 5.72% 4.07% 7.27% Ratio of total expenses to average net assets 0.45% (5) 0.45% 0.45% 0.45% 0.45% (5) Ratio of net investment income to average net assets 3.57% (5) 3.63% 3.95% 3.90% 3.92% (5) Portfolio turnover rate 31.0% 46.9% 55.7% 65.0% 76.2% Net assets, end of period (in thousands) $ 39,727 $ 38,075 $ 36,003 $ 29,373 $ 15,482 (1) Inception date (2) Per share amounts calculated using average shares outstanding method. (3) The amount presented is inconsistent with the fund's aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio. (4) 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. Total return is not annualized for periods less than one year. (5) Annualized The accompanying notes are an integral part of these financial statements. 8

11 Portfolio of Investments T. Rowe Price Institutional Long Duration Credit Fund November 30, 2017 (Unaudited) (Amounts in 000s) CORPORATE BONDS 97.6% Par/Shares $ Value Banking 18.0% Banco Santander 3.80%, 2/23/ Bank of America 3.95%, 4/21/ BPCE 3.50%, 10/23/27 (1) Citigroup, VR 3.887%, 1/10/28 (2) Citigroup 4.60%, 3/9/ Discover Financial Services 3.95%, 11/6/ Goldman Sachs 3.85%, 1/26/ Goldman Sachs 4.75%, 10/21/ JPMorgan Chase, VR 3.882%, 7/24/38 (2) JPMorgan Chase, VR 3.964%, 11/15/48 (2) JPMorgan Chase 5.625%, 8/16/ M&T Bank, VR 5.125% (2)(3) Merrill Lynch 6.11%, 1/29/ Morgan Stanley, VR 3.971%, 7/22/38 (2) Morgan Stanley 4.30%, 1/27/ Morgan Stanley 4.35%, 9/8/ PNC Financial Services, VR 5.00%, (2)(3) Toronto-Dominion Bank, VR 3.625%, 9/15/31 (2) UBS Group Funding 4.125%, 9/24/25 (1) UniCredit 4.625%, 4/12/27 (1) ,140 Basic Industry 4.8% Carpenter Technology 4.45%, 3/1/ Carpenter Technology 5.20%, 7/15/ (Amounts in 000s) Par/Shares $ Value Celulosa Arauco y Constitucion 5.50%, 11/2/47 (1) Ecolab 3.70%, 11/1/ Ecolab 3.95%, 12/1/47 (1) Gerdau Trade 4.875%, 10/24/27 (1) Goldcorp 5.45%, 6/9/ International Paper 4.35%, 8/15/ International Paper 4.80%, 6/15/ Southern Copper 5.25%, 11/8/ West Fraser Timber 4.35%, 10/15/24 (1) ,896 Capital Goods 6.4% Danaher 4.375%, 9/15/ Harris 4.854%, 4/27/ Lockheed Martin 3.80%, 3/1/ Lockheed Martin 4.50%, 5/15/ Martin Marietta Materials 4.25%, 7/2/ Masco 4.50%, 5/15/ Northrop Grumman 3.85%, 4/15/ Vulcan Materials 4.50%, 6/15/ Wabtec 3.45%, 11/15/ Communications 6.1% 2,530 Charter Communications Operating 3.75%, 2/15/ Crown Castle International 4.45%, 2/15/ Crown Castle International 4.75%, 5/15/

12 (Amounts in 000s) Par/Shares $ Value Discovery Communications 3.95%, 3/20/ SBA Tower Trust 3.869%, 10/15/49 (1) Telefonica Emisiones 4.103%, 3/8/ Verizon Communications 4.862%, 8/21/ Verizon Communications 5.25%, 3/16/ Videotron 5.125%, 4/15/27 (1) WPP Finance %, 9/19/ ,406 Consumer Cyclical 4.2% Expedia 3.80%, 2/15/28 (1) Goodyear Tire & Rubber 4.875%, 3/15/ Home Depot 3.90%, 6/15/ Lennar 4.75%, 11/29/27 (1) Priceline Group 3.55%, 3/15/ Priceline Group 3.60%, 6/1/ Visa 4.15%, 12/14/ ,683 Consumer Non-Cyclical 10.2% AbbVie 4.45%, 5/14/ Becton Dickinson 3.70%, 6/6/ Becton Dickinson 4.669%, 6/6/ Celgene 4.35%, 11/15/ Celgene 4.625%, 5/15/ Celgene 5.00%, 8/15/ Celgene 5.25%, 8/15/ Express Scripts Holding 3.40%, 3/1/ (Amounts in 000s) Par/Shares $ Value Express Scripts Holding 4.80%, 7/15/ Johnson & Johnson 3.50%, 1/15/ Medtronic 4.375%, 3/15/ Medtronic 4.625%, 3/15/ Newell Rubbermaid 3.90%, 11/1/ Newell Rubbermaid 5.375%, 4/1/ Shire Acquisition Investments Ireland, 3.20%, 9/23/ Electric 11.5% 4,046 Alabama Power 3.75%, 3/1/ American Transmission Systems 5.00%, 9/1/44 (1) Appalachian Power 4.40%, 5/15/ Appalachian Power 6.375%, 4/1/ Cleveland Electric Illuminating 3.50%, 4/1/28 (1) Commonwealth Edison 4.35%, 11/15/ Consolidated Edison 3.85%, 6/15/ El Paso Electric 5.00%, 12/1/ FirstEnergy Transmission 4.35%, 1/15/25 (1) Kentucky Utilities 4.375%, 10/1/ Louisville Gas & Electric 4.375%, 10/1/ MidAmerican Energy 4.25%, 5/1/ Monongahela Power 5.40%, 12/15/43 (1) Pennsylvania Electric 6.15%, 10/1/ PPL Capital Funding 4.00%, 9/15/ Southern Company 4.25%, 7/1/

13 (Amounts in 000s) Par/Shares $ Value Southern Company 4.40%, 7/1/ ,570 Energy 12.7% APT Pipelines 4.25%, 7/15/27 (1) Boardwalk Pipelines 4.45%, 7/15/ Boardwalk Pipelines 4.95%, 12/15/ Canadian Natural Resources 4.95%, 6/1/ Cenovus Energy 4.25%, 4/15/27 (1) Cimarex Energy 3.90%, 5/15/ Columbia Pipeline Group 4.50%, 6/1/ Concho Resources 3.75%, 10/1/ Concho Resource 4.375%, 1/15/ Enbridge, VR 5.50%, 7/15/77 (2) Enterprise Products, VR 5.25%, 8/16/77 (2) Exxon Mobil 3.567%, 3/6/ Marathon Oil 4.40%, 7/15/ NGPL Pipeco 4.875%, 8/15/27 (1) Plains All American Pipeline 2.85%, 1/31/ Plains All American Pipeline 4.50%, 12/15/ Plains All American Pipeline VR, 6.125% (2)(3) Sabine Pass Liquefaction 4.20%, 3/15/ Sabine Pass Liquefaction 5.00%, 3/15/ Shell International Finance 4.375%, 5/11/ Southern Natural Gas 4.80%, 3/15/47 (1) Spectra Energy Partners 5.95%, 9/25/ (Amounts in 000s) Par/Shares $ Value Suncor Energy 4.00%, 11/15/ TransCanada Trust VR, 5.30%, 3/15/77 (2) Woodside Petroleum 3.65%, 3/5/25 (1) Woodside Petroleum 3.70%, 9/15/26 (1) Woodside Petroleum 3.70%, 3/15/28 (1) ,042 Finance Companies 1.5% Air Lease 3.625%, 4/1/ Air Lease 3.625%, 12/1/ GATX 4.50%, 3/30/ Insurance 7.0% Anthem 4.375%, 12/1/ Arch Capital Finance 4.011%, 12/15/ Chubb INA Holdings 4.35%, 11/3/ CNO Financial 5.25%, 5/30/ First American Financial 4.60%, 11/15/ Liberty Mutual 4.85%, 8/1/44 (1) Lincoln National 3.625%, 12/12/ Principal Financial Group 6.05%, 10/15/ Principal Financial Group VR, 4.70%, 5/15/55 (2) Teachers Insurance and Annuity Association 4.90%, 9/15/44 (1) UnitedHealth Group 4.75%, 7/15/ ,791 11

14 (Amounts in 000s) Natural Gas 0.6% Par/Shares $ Value NiSource Finance 3.95%, 3/30/ Real Estate Investment Trusts 3.6% 220 American Campus Communities 3.625%, 11/15/ American Campus Communities 4.125%, 7/1/ Brixmor Operating Partnership 3.85%, 2/1/ Essex Portfolio 3.375%, 4/15/ Essex Portfolio 3.625%, 5/1/ Goodman Australia Industiral Partnership 3.40%, 9/30/26 (1) Host Hotels & Resorts 4.00%, 6/15/ VEREIT 3.95%, 8/15/ VEREIT 4.875%, 6/1/ ,470 Technology 6.1% Apple 3.75%, 11/13/ Apple 4.375%, 5/13/ Apple 4.65%, 2/23/ Broadcom 3.875%, 1/15/27 (1) Keysight Technologies 4.60%, 4/6/ Microsoft 4.20%, 11/3/ Microsoft 4.25%, 2/6/ Oracle 4.00%, 11/15/ ,407 (Amounts in 000s) Transportation 4.9% Par/Shares $ Value Burlington Northern Santa Fe 4.15%, 4/1/ Burlington Northern Santa Fe 4.55%, 9/1/ Burlington Northern Santa Fe 4.90%, 4/1/ Burlington Northern Santa Fe 5.05%, 3/1/ Canadian National Railway 3.20%, 8/2/ Union Pacific 4.00%, 4/15/ Union Pacific 4.05%, 3/1/ ,967 Total Corporate Bonds (Cost $37,233) 38,769 U.S. GOVERNMENT AGENCY OBLIGATIONS (EXCLUDING MORTGAGE-BACKED) 0.3% U.S. Treasury Obligations 0.3% U.S. Treasury Bond 2.75%, 8/15/ Total U.S. Government Agency Obligations (Excluding Mortgage- Backed) (Cost $113) 113 MUNICIPAL SECURITIES 0.9% Michigan 0.9% Detroit City School Dist. Qualified School Construction Bonds 6.645%, 5/1/ Total Municipal Securities (Cost $362)

15 (Amounts in 000s) Par/Shares SHORT-TERM INVESTMENTS 0.0% $ Value Money Market Funds 0.0% T. Rowe Price Government Reserve Fund, 1.13% (4)(5) 2 2 (Amounts in 000s) $ Value Total Short-Term Investments (Cost $2) 2 Total Investments in Securities 98.8% of Net Assets (Cost $37,710) $ 39,253 Par/Shares are denominated in U.S. dollars unless otherwise noted. (1) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration only to qualified institutional buyers -- total value of such securities at period-end amounts to $5,564 and represents 14.0% of net assets. (2) Security is a fix-to-float security, which carries a fixed coupon until a certain date, upon which it switches to a floating rate. Reference rate and spread is provided if the rate is currently floating. (3) Perpetual security with no stated maturity date. (4) Seven-day yield (5) Affiliated Company VR Variable Rate; rate shown is effective rate at period-end. The rates for certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and based on current market conditions. 13

16 Futures Contracts ($000s) Value and Expiration Notional Unrealized Date Amount Gain/(Loss) Short, 12 U.S. Treasury Notes ten year contracts 3/18 $ (1,489) $ 8 Long, 10 U.S. Treasury Notes thirty year contracts 3/18 1,517 (14) Long, 16 Ultra U.S. Treasury Bonds contracts 3/18 2,638 (33) Net payments (receipts) of variation margin to date 32 Variation margin receivable (payable) on open futures contracts $ (7) 14

17 Affiliated Companies ($000s) The fund may invest in certain securities that are considered affiliated companies. As defined by the 1940 Act, an affiliated company is one in which the fund owns 5% or more of the outstanding voting securities, or a company that is under common ownership or control. The following securities were considered affiliated companies for all or some portion of the six months ended November 30, Net realized gain (loss), investment income, change in net unrealized gain/loss, and purchase and sales cost reflect all activity for the period then ended. Affiliate Net Realized Gain (Loss) Change in Net Unrealized Gain/Loss Investment Income T. Rowe Price Government Reserve Fund $ $ $ 4 Totals $ # $ $ 4+ Supplementary Investment Schedule Affiliate Value 5/31/17 Purchase Cost Sales Cost Value 11/30/17 T. Rowe Price Government Reserve Fund $ 1,718 $ 2 $ 2^ # Capital gain/loss distributions from mutual funds represented $0 of the net realized gain (loss). + Investment income comprised $4 of dividend income and $0 of interest income. Purchase and sale information not shown for cash management funds. ^ The cost basis of investments in affiliated companies was $2. The accompanying notes are an integral part of these financial statements. 15

18 Statement of Assets and Liabilities T. Rowe Price Institutional Long Duration Credit Fund November 30, 2017 (Unaudited) ($000s, except shares and per share amounts) Assets Investments in securities, at value (cost $37,710) $ 39,253 Interest receivable 354 Receivable for investment securities sold 128 Cash deposits on futures contracts 93 Receivable for shares sold 1 Total assets 39,829 Liabilities Investment management and administrative fees payable 14 Variation margin payable on futures contracts 7 Other liabilities 81 Total liabilities 102 NET ASSETS $ 39,727 Net Assets Consist of: Overdistributed net investment income $ (5) Accumulated undistributed net realized gain 313 Net unrealized gain 1,504 Paid-in capital applicable to 3,703,325 shares of $ par value capital stock outstanding; 2,000,000,000 shares of the Corporation authorized 37,915 NET ASSETS $ 39,727 NET ASSET VALUE PER SHARE $ The accompanying notes are an integral part of these financial statements. 16

19 Statement of Operations T. Rowe Price Institutional Long Duration Credit Fund (Unaudited) ($000s) Investment Income (Loss) 6 Months Ended 11/30/17 Income Interest $ 779 Dividend 4 Total income 783 Investment management and administrative expense 88 Net investment income 695 Realized and Unrealized Gain / Loss Net realized gain (loss) Securities 473 Futures 125 Net realized gain 598 Change in net unrealized gain / loss Securities 228 Futures (78) Change in net unrealized gain / loss 150 Net realized and unrealized gain / loss 748 INCREASE IN NET ASSETS FROM OPERATIONS $ 1,443 The accompanying notes are an integral part of these financial statements. 17

20 Statement of Changes in Net Assets T. Rowe Price Institutional Long Duration Credit Fund (Unaudited) ($000s) 6 Months Ended 11/30/17 Year Ended 5/31/17 Increase (Decrease) in Net Assets Operations Net investment income $ 695 $ 1,334 Net realized gain Change in net unrealized gain / loss Increase in net assets from operations 1,443 1,633 Distributions to shareholders Net investment income (695) (1,334) Capital share transactions* Shares sold 1,188 2,492 Distributions reinvested Shares redeemed (534) (1,182) Increase in net assets from capital share transactions 904 1,773 Net Assets Increase during period 1,652 2,072 Beginning of period 38,075 36,003 End of period $ 39,727 $ 38,075 Overdistributed net investment income (5) (5) *Share information Shares sold Distributions reinvested Shares redeemed (50) (112) Increase in shares outstanding The accompanying notes are an integral part of these financial statements. 18

21 Notes to Financial Statements T. Rowe Price Institutional Long Duration Credit Fund November 30, 2017 (Unaudited) T. Rowe Price Institutional Income Funds, Inc. (the corporation) is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional Long Duration Credit Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund seeks to provide high income. Note 1 - Significant Accounting Policies Basis of Preparation The fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 (ASC 946). The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), including, but not limited to, ASC 946. GAAP requires 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 accompanying financial statements may differ from the value ultimately realized upon sale or maturity. Investment Transactions, Investment Income, and Distributions Investment transactions are accounted for on the trade date basis. Income and expenses are recorded on the accrual basis. Realized gains and losses are reported on the identified cost basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income is recorded on the ex-dividend date. Income tax-related interest and penalties, if incurred, are recorded as income tax expense. Income distributions are declared daily and paid monthly. Distributions to shareholders are recorded on the ex-dividend date. A capital gain distribution may also be declared and paid by the fund annually. New Accounting Guidance In March 2017, the FASB issued amended guidance to shorten the amortization period for certain callable debt securities, held at a premium. The guidance is effective for fiscal years and interim periods beginning after December 15, Adoption will have no effect on the fund s net assets or results of operations. On August 1, 2017, the fund implemented amendments to Regulation S-X, issued by the Securities and Exchange Commission, which require standardized, enhanced disclosures, particularly related to derivatives, in investment company financial statements. Adoption had no effect on the fund s net assets or results of operations. Indemnification In the normal course of business, the fund may provide indemnification in connection with its officers and directors, service providers, and/or private company investments. The fund s maximum exposure under these arrangements is unknown; however, the risk of material loss is currently considered to be remote. Note 2 - VALUATION The fund s financial instruments are valued and its net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business. However, the NAV per share may be calculated at a time other than the normal close of the NYSE if trading on the NYSE is restricted, if the NYSE closes earlier, or as may be permitted by the SEC. Fair Value The fund s financial instruments are reported at fair value, which GAAP defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The T. Rowe Price Valuation Committee (the Valuation Committee) is an internal committee that has been delegated certain responsibilities by the fund s Board of Directors (the Board) to ensure that financial instruments are appropriately priced at fair value in accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the Valuation Committee develops and oversees pricing-related policies and procedures and approves all fair value determinations. Specifically, the Valuation Committee establishes procedures to value securities; determines pricing techniques, sources, and persons eligible to effect fair value pricing actions; oversees the selection, services, and performance of pricing vendors; oversees valuationrelated business continuity practices; and provides guidance on internal controls and valuation-related matters. The Valuation Committee reports to the Board and has representation from legal, portfolio management and trading, operations, risk management, and the fund s treasurer. 19

22 Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value: Level 1 quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date Level 2 inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads) Level 3 unobservable inputs Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values. Valuation Techniques Debt securities generally are 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. Generally, debt securities are categorized in Level 2 of the fair value hierarchy; however, to the extent the valuations include significant unobservable inputs, the securities would be categorized in Level 3. Investments in mutual funds are valued at the mutual fund s closing NAV per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy. Financial futures contracts are valued at closing settlement prices and are categorized in Level 1 of the fair value hierarchy. Assets and liabilities other than financial instruments, including shortterm receivables and payables, are carried at cost, or estimated realizable value, if less, which approximates fair value. Thinly traded financial instruments 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 Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded. Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of troubled or thinly traded debt instruments, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer s business prospects, its financial standing and performance, recent investment transactions in the issuer, strategic events affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm s length transactions, to the extent they represent orderly transactions between market participants, transaction information can be reliably obtained, and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such 20

23 as a discount or premium from market value of a similar, freely traded security of the same issuer; discounted cash flows; yield to maturity; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions, and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy. Valuation Inputs The following table summarizes the fund s financial instruments, based on the inputs used to determine their fair values on November 30, 2017: ($000s) Level 1 Level 2 Level 3 Total Value Significant Significant Quoted Observable Unobservable Prices Inputs Inputs Assets Investments in Securities, except: $ $ 39,251 $ $ 39,251 Short-Term Investments 2 2 Total Securities $ 2 $ 39,251 $ $ 39,253 Liabilities Futures Contracts $ 7 $ $ $ 7 There were no material transfers between Levels 1 and 2 during the six months ended November 30, Note 3 - derivative instruments During the six months ended November 30, 2017, the fund invested 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. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts. The fund values its derivatives at fair value 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. Generally, the fund accounts for its derivatives on a gross basis. It does not offset the fair value of derivative liabilities against the fair value of derivative assets on its financial statements, nor does it offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral. As of November 30, 2017, the fund held interest rate futures with cumulative unrealized gain of $8,000 and cumulative unrealized loss of $47,000; the value reflected on the accompanying Statement of Assets and Liabilities is the related unsettled variation margin. Additionally, during the six months ended November 30, 2017, the fund recognized $125,000 of realized gain on Futures and a $(78,000) change in unrealized gain/loss on Futures related to its investment in interest rate derivatives; such amounts are included on the accompanying Statement of Operations. 21

24 Counterparty Risk and Collateral The fund invests in exchange-traded or centrally cleared derivative contracts, such as futures, exchange-traded options, and centrally cleared swaps. Counterparty risk on such derivatives is minimal because the clearinghouse provides protection against counterparty defaults. For futures and centrally cleared swaps, the fund is required to deposit collateral in an amount specified by the clearinghouse and the clearing firm (margin requirement), and the margin requirement must be maintained over the life of the contract. Each clearinghouse and clearing firm, in its sole discretion, may adjust the margin requirements applicable to the fund. Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies. Cash posted by the fund is reflected as cash deposits in the accompanying financial statements and generally is restricted from withdrawal by the fund; securities posted by the fund are so noted in the accompanying Portfolio of Investments; both remain in the fund s assets. While typically not sold similar to equity or fixed income securities, exchange-traded or centrally cleared derivatives may be closed out only on the exchange or clearinghouse where the contracts were traded. This ability is subject to the liquidity of underlying positions. As of November 30, 2017, cash of $93,000 had been posted by the fund for exchange-traded and/or centrally cleared derivatives. Futures Contracts The fund is subject to interest rate risk in the normal course of pursuing its investment objectives and uses futures contracts to help manage such risk. The fund may enter into futures contracts to manage exposure to interest rate and yield curve movements, security prices, foreign currencies, credit quality, and mortgage prepayments; as an efficient means of adjusting exposure to all or part of a target market; to enhance income; as a cash management tool; or to adjust portfolio duration and credit exposure. A futures contract provides for the future sale by one party and purchase by another of a specified amount of a specific underlying financial instrument at an agreed-upon price, date, time, and place. The fund currently invests only in exchange-traded futures, which generally are standardized as to maturity date, underlying financial instrument, and other contract terms. Payments are made or received by the fund each day to settle daily fluctuations in the value of the contract (variation margin), which reflect changes in the value of the underlying financial instrument. Variation margin is recorded as unrealized gain or loss until the contract is closed. The value of a futures contract included in net assets is the amount of unsettled variation margin; net variation margin receivable is reflected as an asset and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities. Risks related to the use of futures contracts include possible illiquidity of the futures markets, contract prices that can be highly volatile and imperfectly correlated to movements in hedged security values and/or interest rates, and potential losses in excess of the fund s initial investment. During the six months ended November 30, 2017, the volume of the fund s activity in futures, based on underlying notional amounts, was generally between 8% and 10% of net assets. 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. Other Purchases and sales of portfolio securities other than short-term and U.S. government securities aggregated $12,059,000 and $10,240,000, respectively, for the six months ended November 30, Purchases and sales of U.S. government securities aggregated $798,000 and $1,545,000, respectively, for the six months ended November 30,