Dynamic Global Bond Fund Dynamic Global Bond Fund Advisor Class Dynamic Global Bond Fund I Class

Transcription

1 annual REPORT December 31, 2017 RPIEX PAIEX RPEIX T. Rowe Price Dynamic Global Bond Fund Dynamic Global Bond Fund Advisor Class Dynamic Global Bond Fund I Class (Formerly Global Unconstrained Bond Fund) The fund invests in a globally diversified blend of investment-grade and below investment-grade bonds for high current income.

2 HIGHLIGHTS The U.S. Treasury yield curve flattened and yields on high-quality eurozone government bonds gradually increased later in 2017 as regional growth strengthened, while riskier fixed income markets continued to strengthen amid very low volatility. The Dynamic Global Bond Fund underperformed its three-month LIBOR benchmark amid very low market volatility in Using the full global fixed income universe, we actively manage the fund s allocation to global government bond markets and, to a lesser extent, security selection within credit sectors, while at the same time implementing strategies to protect the fund against downside risk. While volatility has stayed low, early signs of systemic risk volatility are developing in both fixed income and currency markets, which should make the environment more rewarding for our investment approach. The views and opinions in this report were current as of December 31, 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. REPORTS ON THE WEB Sign up for our Program, and you can begin to receive updated fund reports and prospectuses online rather than through the mail. Log in to your account at troweprice.com for more information.

3 Manager s Letter Fellow Shareholders Volatility in yields on high-quality developed markets government debt was low. The U.S. Treasury yield curve flattened as anticipation of the Federal Reserve s slow interest rate normalization pushed short-term yields higher while limited inflation pressure benefited longer-maturity Treasuries. Surprisingly strong eurozone growth led to an uptick in yields on German sovereign bonds near the end of the year. Riskier fixed income markets continued to strengthen amid very low volatility. The Dynamic Global Bond Fund underperformed its benchmark (which represents cash rates) in an environment where its main defensive characteristics could not fully benefit investors. While duration management contributed to returns during the year, overall performance was negatively impacted by security selection and sector allocation. This was largely the result of the poor performance of one European high yield bond holding and a general defensive stance toward credit markets that dragged performance down. PERFORMANCE COMPARISON The Dynamic Global Bond Fund returned -1.90% for the 12-month period ended December 31, The portfolio underperformed the three-month LIBOR benchmark. (Results for Advisor and I Class shares vary, reflecting their different fee structures.) The Dynamic Global Bond Fund seeks to deliver consistent positive returns through dynamic allocations to fixed income instruments from a broad, global opportunity set. The strategy is not benchmark sensitive and has wide latitude to invest in a variety of fixed income 1

4 Performance Comparison Total Return Periods Ended 12/31/17 6 Months 12 Months Dynamic Global Bond Fund -0.07% -1.90% Dynamic Global Bond Fund Advisor Class Dynamic Global Bond Fund I Class Month LIBOR in USD sectors, including global government bonds, securitized assets, instruments that track credit risk, emerging markets debt, and currencies. The proprietary fundamental research generated by T. Rowe Price s global fixed income platform drives the portfolio s security selection. The strategy also seeks to provide downside protection and lower volatility than many of its peers, in particular striving to offer a source of diversification during equity market downturns. MARKET ENVIRONMENT U.S. gross domestic product increased at annualized rates of 3.1% and 3.2% in the second and third quarters, respectively, rebounding from a weak first quarter. The U.S. labor market was healthy, with the national unemployment rate reaching a 17-year low of 4.1% in 2017 s fourth quarter. Even with very weak readings from early 2017 in the rearview mirror, inflation remained subdued. Citing the strengthening labor market and expectations that inflation would move higher over the medium term, the Fed raised short-term interest rates by 25 basis points in March, June, and December, lifting the federal funds target rate to a range of 1.25% to 1.50%. Additionally, in October, the Fed began the process of slowly unwinding its $4.5 trillion balance sheet. While UK growth remained positive and the pound sterling gained versus the U.S. dollar in the reporting period, the decline in the value of sterling since the Brexit vote triggered an increase in inflation. In November, the Bank of England (BoE) raised its benchmark lending rate by 25 basis points to 0.50% in an effort to subdue inflation. The rate hike was the first from the BoE since Eurozone growth was surprisingly strong, leading many market participants to anticipate that the European Central Bank (ECB) would begin to remove its accommodative monetary policy. In October, ECB President Mario Draghi announced that the central bank would continue to buy 2

5 6% bonds at least through September 2018 while cutting the size of its monthly purchases in half beginning in January Japanese growth remained sluggish and inflation persistently low, leading the Bank of Japan to maintain its government bond purchase policy that targets a 0% yield on the 10-year Japanese government bond. Growth in emerging markets as a whole continued to outpace expansion in developed markets, although there was more dispersion 10-Year Treasury Note in the economic health 3 Month LIBOR in USD of individual emerging countries as a result of idiosyncratic themes. Interest Rate Levels 12/31/16 3/17 6/17 9/17 12/31/17 Sources: J.P. Morgan and the Federal Reserve Board. The U.S. Treasury yield curve flattened as anticipation of the Fed s slow interest rate normalization pushed short-term yields higher while limited inflation pressure benefited longermaturity Treasuries, whose yields decreased. U.S. Treasuries offered a meaningful yield premium over high-quality government bonds from other developed markets, supporting demand. The 10-year U.S. Treasury note s yield finished the year at 2.40%, down modestly from 2.45% at the beginning of Volatility in Treasuries was unusually low. The yield on the 10-year U.S. Treasury note generally stayed between 2.10% and 2.55% during the year, a tight 45-basis-point range. In 2016, the yield varied from about 1.40% to 2.60%, a much larger 120-basis-point range. Volatility was similarly low in core eurozone government debt, although the German 10-year bund yield increased near the end of the year to around 0.45% amid stronger-than-expected growth in Europe. The yield on the 10-year UK sovereign note finished the year little changed at about 1.20% after anticipation of the BoE s rate increase helped push yields up from their midyear lows. There was modestly higher volatility in emerging markets government debt, given the differing monetary policies and political situations across individual countries. 3

6 Global Bond Market Returns Periods Ended 12/31/17 Total Return 6 Months 12 Months J.P. Morgan Emerging Markets Bond Index Plus 1.90% 8.29% BofA Merrill Lynch Global High Yield Index Hedged to USD Credit Suisse High Yield Index Bloomberg Barclays U.S. Corporate Investment-Grade Bond Index J.P. Morgan GBI-EM Global Diversified Hedged USD Bloomberg Barclays Euro-Aggregate: Corporate Bond Hedged Index S&P/LSTA Performing Loan Index Bloomberg Barclays Global Aggregate ex USD Bond USD Hedged Index Bloomberg Barclays U.S. Treasury Bond Index U.S. high yield bonds rallied through most of the year, supported by rising prices of oil and other commodities in the second half of the year. The price of a barrel of Brent crude oil, the global benchmark, finished 2017 at nearly $67 after starting the year at about $55 and falling below $45 in June. Noninvestmentgrade bonds from issuers in industries related to commodities account for a significant proportion of the U.S. high yield market. Credit spreads on U.S. high yield reached their narrowest levels in 10 years late in In Europe, high yield bond credit spreads compressed so much that the yield of the sector, as measured by the J.P. Morgan European Currency High Yield Index, reached 3.00% in October, compared with an average yield since 1999 of 8.78%, before widening somewhat at the end of the year. Although they lagged high yield bonds, investment-grade corporate bonds from U.S. issuers posted solid gains, benefiting from anticipation of tax reform from the Trump administration. European investment-grade corporates underperformed their U.S. cousins. Mortgage- and asset-backed securities generated modestly positive returns, with early-year uncertainty about the Fed s plans to reduce its reinvestment in its mortgage-backed securities weighing on that sector. Sovereign and corporate bonds from emerging markets were among the best-performing fixed income segments in 2017, benefiting from the ongoing search for higher-yielding assets in an environment of low interest rates. 4

7 The U.S. dollar lost ground against most other currencies in 2017, ending the greenback s multiyear run of strength. The euro gained nearly 14% against the U.S. dollar as eurozone growth prospects began to look brighter while optimism about expansionary fiscal policies in the U.S. faded. The British pound recovered some of its post-brexit losses by returning over 9% versus the dollar, while the Japanese yen climbed about 3.5%. In emerging markets, the Czech koruna and the Polish zloty were standout performers in 2017, each gaining over 20% amid strong economic growth across Europe. However, the Brazilian real lost almost 2% as the country s central bank cut rates, making its currency relatively less attractive. PERFORMANCE AND INVESTMENT REVIEW The portfolio underperformed the benchmark for the 12-month period. While we are disappointed in the fund s performance, the specific objective of diversification against equity market returns makes it more difficult for the fund to outperform in periods of low volatility. Furthermore, some of our bottom-up security selection in European high yield proved detrimental. While this type of exposure is clearly a risk for such a concentrated strategy, this does not make the performance any less disappointing. On the positive side, active duration management continued to prove beneficial, and we now anticipate that volatility will soon return to the market, providing a more favorable environment for our strategy. Although the benchmark is three-month LIBOR, the portfolio s unconstrained approach makes direct positioning comparisons with the benchmark much less informative than for traditional fixed income funds whose holdings are more closely aligned with an index. As a result, we refer to positions as long (those benefiting from an increase in price) or short (those benefiting from a decrease in price) as opposed to overweight or underweight relative to the benchmark. The portfolio s overall duration and country positioning had a positive impact on returns in After starting the year with an overall portfolio duration slightly under two years, we meaningfully added duration over the first half of the year as it appeared that inflation would stay low. By the end of June, overall duration had reached just over five years. However, by the third quarter, economic data had started to show that global growth was strengthening, so we 5

8 Portfolio Characteristics Periods Ended 6/30/17 12/31/17 Dynamic Global Bond Fund Share Price $9.86 $9.82 Dividends Per Share For 6 Months For 12 Months SEC Yield With Waiver a (30-day) 2.19% 2.16% SEC Yield Without Waiver (30-day) 2.10% 2.13% Dynamic Global Bond Fund Advisor Class Share Price $9.85 $9.81 Dividends Per Share For 6 Months For 12 Months SEC Yield With Waiver b (30-day) 2.04% 1.91% SEC Yield Without Waiver (30-day) 1.45% 1.52% Dynamic Global Bond Fund I Class Share Price $9.86 $9.82 Dividends Per Share For 6 Months For 12 Months SEC Yield With Waiver c (30-day) 2.41% 2.26% SEC Yield Without Waiver (30-day) 2.33% 2.23% Weighted Average Maturity (years) Weighted Average Effective Duration (years) month dividends may not equal the combined 6-month figures due to rounding. a Through April 30, 2019, T. Rowe Price Associates (TRPA), has agreed to waive its management fees or bear any expenses (excluding interest; expenses related to borrowings, taxes, and brokerage; nonrecurring, extraordinary expenses; and acquired fund fees and expenses) that would cause the class s ratio of expenses to average daily net assets to exceed 0.75%. Details are available in the fund s prospectus. positioned the portfolio for synchronized central bank tightening and higher rates by shortening duration. We did this by reducing exposure to shorter U.S. Treasury maturities which also positioned the fund for a flattening in the U.S. yield curve as well as German, French, and Italian government debt. We continued to reduce overall duration through the end of the year by tactically implementing short duration positions in Germany and Italy as well as maintaining short exposure to Hong Kong and the UK, where we believed that the market was underestimating the potential for the BoE to adopt a more hawkish tone. By the end of the year, the portfolio s overall duration had reached -0.9 years. We also made tactical adjustments to the portfolio s exposure to emerging markets duration as risk sentiment evolved over the course of the reporting period as well as in response to country-specific developments. The 6

9 Portfolio Characteristics (continued) portfolio maintained b Through April 30, 2019, TRPA has agreed to waive its long positions in locally management fees or bear any expenses (excluding denominated sovereign interest; expenses related to borrowings, taxes, and bonds from Brazil and brokerage; nonrecurring, extraordinary expenses; and acquired fund fees and expenses) that would cause Serbia through much of the class s ratio of expenses to average daily net 2017 as central banks assets to exceed 0.90%. Details are available in the fund s prospectus. in those countries cut their benchmark lending c Through April 30, 2018, TRPA has agreed to pay the rates, although we operating expenses of the fund s I Class, excluding reduced the size of the management fees; interest; expenses related to borrowings, taxes, and brokerage; nonrecurring, Serbian exposure later extraordinary expenses; and acquired fund fees and in the year. Around expenses (I Class operating expenses) to the extent midyear, we added to the I Class operating expenses exceed a certain a long position in local portion of the class s average daily net assets. Mexican government Details are available in the fund s prospectus. bonds because the country s central bank appeared ready to transition to easing policy after making a series of rate hikes to boost the peso. However, in December we reduced the Mexico exposure when it appeared that the central bank was poised to raise interest rates to restrain inflationary pressure. In Asian emerging markets, the portfolio was long Malaysia, which tends to be less correlated with Quality Diversification U.S. Treasury yields A Rated and Above BBB Rated BB Rated B Rated and Below Not Rated Reserves 61% and so would probably be less susceptible to a sell-off in U.S. rates. We also maintained a short position in Hong Kong as a hedge against the risk of an abrupt downturn in China. Based on net assets as of 12/31/17. Sources: Moody s Investors Service; if Moody s does not rate a security, then Standard & Poor s (S&P) is used as a secondary source. When available, T. Rowe Price will use Fitch for securities that are not rated by Moody s or S&P. T. Rowe Price does not evaluate these ratings but simply assigns them to the appropriate credit quality category as determined by the rating agency. The portfolio maintained several hedges against widening credit spreads, which we believed were a significant risk as spreads continued to narrow across many asset classes with credit risk. These 7

10 hedges were short positions in credit indexes as well as short exposure to individual U.S. corporate bond issuers in the automotive, oil, and commodity industries. In the first half of 2017, we shifted the bulk of our corporate credit shorts from the eurozone to the U.S. because the ECB s ongoing bond buying supported the eurozone credit market. By midyear, we had meaningfully reduced the short position in European high yield and boosted the short in the U.S. noninvestment-grade market, which we maintained through the end of the year. Most of these hedges weighed on the fund s performance as credit spreads narrowed further in In addition, the fund s holdings of bonds from European high yield issuer Agrokor weighed meaningfully on returns. Agrokor is a Croatian food and beverage company that operates a large distribution business in southern Europe. The price of these bonds moved into distressed territory in Security Diversification Percent of Net Assets 6/30/17 12/31/17 Government 74% 77% Corporate 6 7 Collateralized 7 6 Sub-investment Grade 5 3 Agency/Supranational 2 1 Derivatives -2-3 Cash Equivalents 8 9 Total 100% 100% the first half of 2017 as liquidity concerns plagued Agrokor s capital structure and the company entered bankruptcy. We are closely monitoring this issuer as part of its secured bondholder group and believe that the Croatian government could support the credit. Largely as a result of this particular exposure, security selection was a negative performance factor for the reporting period. (Please refer to the fund s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) The fund started the reporting period with a short position in the Japanese yen. The fund also had short positions in the Chinese renminbi and the Taiwan dollar early in the year, paired with a long position in the Australian dollar, as a hedge against a downturn in China. Over the course of the first half of 2017, we reduced the size of the long U.S. dollar exposure and closed the short position in China s currency as we saw fewer catalysts for depreciation. We also added a long position in the euro, which we believed would benefit from 8

11 stronger European growth momentum. In the third quarter, we shifted the long euro exposure to a short position, increasing the long position in the U.S. dollar. The portfolio was also short the UK pound sterling and the Brazilian real. Later in the year, we shifted to long positions in both the pound sterling, as the BoE prepared to raise rates, and the Brazilian real. In Asia, the portfolio was long the Indian rupee and short the Taiwan dollar and the South Korean won to varying degrees as a way to hedge against geopolitical risk on the Korean Peninsula. The fund s overall currency positioning had a slightly negative impact on returns in We actively manage downside risk in the portfolio. Some of our currency positions are driven by their defensive characteristics as we continue to monitor potential illiquidity in the markets and investors behavior in times of market stress. We can employ a wide range of techniques to manage downside risk, which can involve credit derivatives on indexes and individual issuers as well as put options on broad stock market indexes. We choose hedging instruments based on which provide the best combination of low cost, liquidity, and protection against a broad downturn in stocks, bonds, or currencies. We also use derivatives to gain exposure to certain sectors or asset classes. The fund s exposure to derivatives detracted from absolute performance during the reporting period. Currency forward contracts were the principal detractors. OUTLOOK We will continue to closely monitor inflation readings because we believe that there is potential for price pressures to start rising modestly as a result of stronger global growth, higher oil prices, and tight labor markets in several developed countries. There are also signs that inflation has reached a bottom in emerging markets, with the exception of some isolated situations such as Mexico. Given that consensus inflation expectations still remain subdued, even a tentative rise could catch markets off guard and lead to a repricing in core bond markets that pushes yields higher. There are also meaningful risks in the political sphere. Although the Trump administration has delivered tax reform, significant uncertainty still surrounds the U.S. president s ability to deliver on many of his campaign promises. Direct fiscal stimulus in the form of infrastructure spending has been delayed, while the U.S. government 9

12 continues to pursue trade protection measures that could have negative ramifications for the global economy if implemented. In Europe, fears of populism have receded, but Italy s March elections have the potential to reignite political risk. Also, noise and ambiguity about the UK s exit from the European Union are likely to continue through The uncertainty dominating the market environment should provide a tailwind for our strategy as we try to find sectors and individual securities that are mispriced as a result of temporary market dislocations. We will continue to follow our trusted investment process and strive to maintain a portfolio that strikes a balance between country, duration, and yield curve positioning to take advantage of relative value opportunities globally while also managing downside risks. Thank you for investing with T. Rowe Price. Respectfully submitted, Arif Husain Chairman of the fund s Investment Advisory Committee January 23, 2018 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. 10

13 Risks of Bond 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 (fail to make timely payments of interest or principal), potentially reducing the fund s income level and share price. Mortgage-backed securities are subject to prepayment risk, particularly if falling rates lead to heavy refinancing activity, and extension risk, which is an increase in interest rates that causes a fund s average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This could increase the fund s sensitivity to rising interest rates and its potential for price declines. International investments are subject to currency risk, a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency. The overall impact on a fund s holdings can be significant and long-lasting depending on the currencies represented in the portfolio, how each one appreciates or depreciates in relation to the U.S. dollar, and whether currency positions are hedged. Further, exchange rate movements are unpredictable and it is not possible to effectively hedge the currency risks of many developing countries. The fund s use of derivatives may expose it to additional volatility in comparison with investing directly in bonds and other debt securities. Derivatives can be illiquid and difficult to value and may involve leverage so that small changes produce disproportionate losses for the fund, and any instruments not traded on an exchange are subject to counterparty risk. The fund s principal use of derivatives involves the risk that interest rate movements, changes in currency values and exchange rates, or the creditworthiness of an issuer will not be accurately predicted, which could significantly harm performance and impair efforts to reduce overall volatility. Glossary 3 Month LIBOR in USD: The three-month London interbank offered rate, which is the interest rate that banks charge each other for U.S. dollar loans. Basis point: Equivalent to 0.01 percentage points. Bloomberg Barclays Euro-Aggregate: Corporate Bond Hedged Index: Tracks the performance of European investment-grade corporate bonds, hedged to offset the effects of currency fluctuations in U.S. dollar terms. Bloomberg Barclays Global Aggregate ex-u.s. Dollar Bond Index: Tracks the performance of government, corporate, agency, and mortgage-related bonds in Europe, the Asia-Pacific region, and Canada. 11

14 Glossary (continued) Bloomberg Barclays U.S. Corporate Investment-Grade Bond Index: A measure of corporate and noncorporate fixed income securities that are primarily rated investment grade (Baa by Moody s Investors Service and BBB by Standard & Poor s). Bloomberg Barclays U.S. Treasury Bond Index: An unmanaged index of publicly traded obligations of the U.S. Treasury. BofA Merrill Lynch Global High Yield Index Hedged to USD: Tracks the performance of global noninvestment-grade bonds, hedged to offset the effects of currency fluctuations in U.S. dollar terms. 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. Credit Suisse High Yield Index: An index that tracks the performance of domestic noninvestment-grade corporate bonds. Duration: A measure of a bond fund s sensitivity to changes in interest rates. For example, a fund with a four-year duration would fall about 4% in response to a one-percentage-point rise in interest rates, and vice versa. Federal funds rate: The interest rate charged on overnight loans of reserves by one financial institution to another in the U.S. The Federal Reserve sets a target federal funds rate to affect the level and direction of market rates. Gross domestic product: The total market value of all goods and services produced in a country in a given year. J.P. Morgan Emerging Markets Bond Index Plus: Tracks the total return of U.S. dollar and external currency debt instruments traded in emerging markets. J.P. Morgan GBI-EM Global Diversified Hedged USD: A capitalization-weighted index tracking emerging markets government bonds denominated in local currencies, hedged to offset the effects of currency fluctuations in U.S. dollar terms. Put option: Gives the holder the right, but not the obligation, to sell the underlying asset at a specified price on or before a specific date. 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. S&P/LSTA Performing Loan Index: A benchmark that tracks the performance of the leveraged loan market. 12

15 Glossary (continued) 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. 13

16 Performance and Expenses Growth of $10,000 This chart shows the value of a hypothetical $10,000 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. DYNAMIC GLOBAL BOND FUND $11,500 11,200 10,900 10,600 10,300 10,000 As of 12/31/17 Dynamic Global Bond Fund $10,679 3 Month LIBOR in USD $10,233 1/22/15 12/15 12/16 12/17 Note: Performance for the Advisor and I Class shares will vary due to their differing fee structures. See returns table below. Average Annual Compound Total Return Since Inception Periods Ended 12/31/17 One Year Inception Date Dynamic Global Bond Fund -1.90% 2.26% 1/22/15 Dynamic Global Bond Fund Advisor Class /22/15 Dynamic Global Bond Fund I Class /28/15 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 visit our website (troweprice.com) or contact a T. Rowe Price representative at , or for Advisor and I Class shares, 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. 14

17 Expense Ratio Dynamic Global Bond Fund 1.16% Dynamic Global Bond Fund Advisor Class 1.52 Dynamic Global Bond Fund I Class 0.69 The expense ratio shown is as of the fund s fiscal year ended 12/31/16. 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. 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. Please note that the fund has three share classes: The original share class (Investor Class) charges no distribution and service (12b-1) fee, Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee, and I Class shares are available to institutionally oriented clients and impose no 12b-1 or administrative fee payment. Each share class is presented separately in the table. Actual Expenses The first line of the following table (Actual) provides information about actual account values and expenses based on the fund s actual returns. 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. 15

18 Fund Expense Example (continued) Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Personal Services or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $250,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. 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. Dynamic Global Bond Fund Beginning Ending Expenses Paid Account Value Account Value During Period* 7/1/17 12/31/17 7/1/17 to 12/31/17 Investor Class Actual $1, $ $3.02 Hypothetical (assumes 5% return before expenses) 1, , Advisor Class Actual 1, Hypothetical (assumes 5% return before expenses) 1, , I Class Actual 1, Hypothetical (assumes 5% return before expenses) 1, , * Expenses are equal to the fund s annualized expense ratio for the 6-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (184), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.60%, the Advisor Class was 0.90%, and the I Class was 0.53%. 16

19 Financial Highlights For a share outstanding throughout each period Investor Class Year Ended 12/31/17 12/31/16 1/22/15 (1) Through 12/31/15 NET ASSET VALUE Beginning of period $ $ 9.89 $ Investment activities Net investment income (2) 0.21 (3) 0.15 (3) 0.21 (4) Net realized and unrealized gain / loss (0.40) Total from investment activities (0.19) Distributions Net investment income (0.06) (0.10) (0.10) Net realized gain (5) (0.18) (0.41) Total distributions (0.06) (0.28) (0.51) NET ASSET VALUE End of period $ 9.82 $ $ 9.89 Ratios/Supplemental Data Total return (6) (1.90)% (3) 4.62% (3) 4.05% (4) Ratio of total expenses to average net assets 0.60% (3) 0.65% (3) 0.75% (4)(7) Ratio of net investment income to average net assets 2.47% (3) 1.49% (3) 2.17% (4)(7) Portfolio turnover rate 109.6% 178.5% 183.1% Net assets, end of period (in thousands) $ 1,647,814 $ 44,067 $ 33,900 (1) Inception date (2) Per share amounts calculated using average shares outstanding method. (3) The class operated below its contractual expense limitation (see Note 6) related to the waiver of fund-level expenses ratably across all classes in accordance with SEC rules. (4) See Note 6. Excludes expenses in excess of a 0.75% contractual expense limitation in effect through 4/30/19. (5) Amounts round to less than $0.01 per share. (6) 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. (7) Annualized The accompanying notes are an integral part of these financial statements. 17

20 Financial Highlights For a share outstanding throughout each period Advisor Class Year Ended 12/31/17 12/31/16 1/22/15 (1) Through 12/31/15 NET ASSET VALUE Beginning of period $ $ 9.89 $ Investment activities Net investment income (2) 0.19 (3)(7) 0.13 (3) 0.22 (3) Net realized and unrealized gain / loss (0.41) Total from investment activities (0.22) Distributions Net investment income (0.03) (0.08) (0.09) Net realized gain (4) (0.18) (0.41) Total distributions (0.03) (0.26) (0.50) NET ASSET VALUE End of period $ 9.81 $ $ 9.89 Ratios/Supplemental Data Total return (5) (2.15)% (3)(7) 4.34% (3) 3.88% (3) Ratio of total expenses to average net assets 0.91% (3)(7) 0.90% (3) 0.90% (3)(6) Ratio of net investment income to average net assets 2.03% (3)(7) 1.25% (3) 2.38% (3)(6) Portfolio turnover rate 109.6% 178.5% 183.1% Net assets, end of period (in thousands) $ 377 $ 1,989 $ 1,555 (1) Inception date (2) Per share amounts calculated using average shares outstanding method. (3) See Note 6. Excludes expenses in excess of a 0.90% contractual expense limitation in effect through 4/30/19. (4) Amounts round to less than $0.01 per share. (5) 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. (6) Annualized (7) Includes investment-related costs borne by the fund in excess of the expense limitation. The accompanying notes are an integral part of these financial statements. 18

21 Financial Highlights For a share outstanding throughout each period I Class Year Ended 12/31/17 12/31/16 8/28/15 (1) Through 12/31/15 NET ASSET VALUE Beginning of period $ $ 9.89 $ Investment activities Net investment income (2) 0.24 (3) 0.17 (3) 0.16 (3) Net realized and unrealized gain / loss (0.42) 0.29 (0.06) Total from investment activities (0.18) Distributions Net investment income (0.07) (0.10) (0.08) Net realized gain (4) (0.18) (0.41) Total distributions (0.07) (0.28) (0.49) NET ASSET VALUE End of period $ 9.82 $ $ 9.89 Ratios/Supplemental Data Total return (5) (1.80)% (3) 4.69% (3) 1.04% (3) Ratio of total expenses to average net assets 0.54% (3) 0.54% (3) 0.54% (3)(6) Ratio of net investment income to average net assets 2.46% (3) 1.76% (3) 4.67% (3)(6) Portfolio turnover rate 109.6% 178.5% 183.1% Net assets, end of period (in thousands) $ 523,274 $ 195,881 $ 240 (1) Inception date (2) Per share amounts calculated using average shares outstanding method. (3) See Note 6. Excludes expenses in excess of a 0.05% contractual operating expense limitation in effect through 4/30/18. (4) Amounts round to less than $0.01 per share. (5) 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. (6) Annualized The accompanying notes are an integral part of these financial statements. 19

22 December 31, 2017 Portfolio of Investments Par/Shares $ Value (Cost and value in $000s) ARGENTINA 1.3% Government Bonds 1.3% Republic of Argentina, FRN, BDLRPP %, 22.75%, 3/1/20 49,665,000 2,727 Republic of Argentina, FRN, 7D ARPP, 28.75%, 6/21/20 456,000,000 26,027 Total Argentina (Cost $30,823) 28,754 AUSTRALIA 4.9% Corporate Bonds 0.4% National Australia Bank, 0.875%, 6/26/20 (GBP) 3,400,000 4,566 National Australia Bank, 1.875%, 2/20/20 (GBP) 2,400,000 3,298 Scentre Management, FRN, 3M EURIBOR % 0.321%, 7/16/18 (EUR) 150, Transurban Finance, 2.50%, 10/8/20 (EUR) 500, Government Bonds 4.5% 8,679 Commonwealth of Australia, 1.75%, 11/21/20 127,550,000 98,447 98,447 Total Australia (Cost $105,839) 107,126 BRAZIL 2.6% Government Bonds 2.6% Brazil Notas do Tesouro Nacional, Series F, 10.00%, 1/1/27 186,600,000 55,424 Total Brazil (Cost $56,853) 55,424 CHILE 5.2% Government Bonds 5.2% Bonos Vigentes Tesoreria de la Republica de Chile 4.50%, 3/1/21 46,840,000,000 78,285 Bonos Vigentes Tesoreria de la Republica de Chile 4.50%, 3/1/26 21,195,000,000 34,369 Total Chile (Cost $108,711) 112,654 20

23 (Cost and value in $000s) CHINA 0.1% Par/Shares $ Value Government Bonds 0.1% People's Republic of China, 3.13%, 4/13/22 2,140, People's Republic of China, 3.52%, 5/4/27 15,500,000 2,306 Total China (Cost $2,570) 2,626 CROATIA 0.1% Corporate Bonds 0.1% Agrokor, 9.875%, 5/1/19 (EUR) (1)(2) 5,875,000 1,886 Total Croatia (Cost $4,872) 1,886 CYPRUS 3.7% Government Bonds 3.7% Republic of Cyprus, 2.75%, 6/27/24 (EUR) 12,455,000 16,237 Republic of Cyprus, 3.75%, 7/26/23 (EUR) 490, Republic of Cyprus, 3.875%, 5/6/22 (EUR) 47,189,000 63,743 Total Cyprus (Cost $78,233) 80,649 FRANCE 0.6% Corporate Bonds 0.6% Carrefour Banque, FRN, 3M EURIBOR % 0.563%, 10/21/19 1,500,000 1,823 RCI Banque, 1.125%, 9/30/19 3,400,000 4,160 RCI Banque, 2.25%, 3/29/21 6,000,000 7,632 Total France (Cost $13,355) 13,615 GERMANY 0.1% Corporate Bonds 0.1% Daimler AG, 2.375%, 7/16/18 (GBP) 1,200,000 1,634 21

24 (Cost and value in $000s) Par/Shares $ Value Garfunkelux, 8.50%, 11/1/22 (GBP) 950,000 1,340 Total Germany (Cost $2,791) 2,974 ICELAND 1.3% Corporate Bonds 0.1% Arion Bank, 2.50%, 4/26/19 (EUR) 1,980,000 2,450 2,450 Government Bonds 1.2% Islandsbanki, 1.75%, 9/7/20 (EUR) 960,000 1,192 Landsbankinn, 1.375%, 3/14/22 (EUR) 10,000,000 12,261 Landsbankinn, 1.625%, 3/15/21 (EUR) 9,616,000 11,903 25,356 Total Iceland (Cost $26,803) 27,806 IRELAND 0.3% Corporate Bonds 0.3% Shire Acquisition Investments Ireland, 1.90%, 9/23/19 (USD) 1,605,000 1,591 Shire Acquisition Investments Ireland, 2.40%, 9/23/21 (USD) 4,000,000 3,931 Total Ireland (Cost $5,594) 5,522 ISRAEL 10.6% Corporate Bonds 0.1% Teva Pharmaceutical Finance III, 1.70%, 7/19/19 (USD) 1,625,000 1,577 1,577 Government Bonds 10.5% Government of Israel, 1.00%, 4/30/21 3,535,000 1,036 Government of Israel, 2.00%, 3/31/27 177,660,000 52,596 22

25 (Cost and value in $000s) Par/Shares $ Value Government of Israel, 5.50%, 1/31/22 503,220, , ,269 Total Israel (Cost $224,617) 228,846 ITALY 6.3% Corporate Bonds 1.1% Enel, 6.25%, 6/20/19 (GBP) 1,500,000 2,175 FCA Capital Ireland, 1.625%, 9/29/21 (GBP) 3,295,000 4,446 UniCredit International Bank, 6.95%, 10/31/22 11,100,000 16,371 22,992 Government Bonds 5.2% Italy Buoni Poliennali Del Tesoro, 2.15%, 12/15/21 88,620, , ,179 Total Italy (Cost $133,163) 136,171 LUXEMBOURG 0.7% Corporate Bonds 0.7% Altice Financing, 7.50%, 5/15/26 (USD) 14,920,000 15,890 Total Luxembourg (Cost $16,039) 15,890 MALAYSIA 7.0% Government Bonds 7.0% 1MDB Global Investments, 4.40%, 3/9/23 (USD) 8,800,000 8,571 Government of Malaysia, 3.492%, 3/31/20 76,755,000 19,094 Government of Malaysia, 3.62%, 11/30/21 58,250,000 14,468 Government of Malaysia, 3.659%, 10/15/20 302,225,000 75,362 Government of Malaysia, 3.889%, 7/31/20 52,750,000 13,234 Government of Malaysia, 4.736%, 3/15/46 69,670,000 16,914 Government of Malaysia, 4.935%, 9/30/43 21,240,000 5,294 Total Malaysia (Cost $147,703) 152,937 23

26 (Cost and value in $000s) MEXICO 0.4% Par/Shares $ Value Government Bonds 0.4% United Mexican States, 7.75%, 11/13/42 183,819,000 9,302 Total Mexico (Cost $9,709) 9,302 NETHERLANDS 0.4% Corporate Bonds 0.4% Leaseplan, 1.00%, 4/8/20 6,700,000 8,191 Total Netherlands (Cost $7,921) 8,191 PHILIPPINES 0.9% Government Bonds 0.9% Republic of Philippines, 3.90%, 11/26/22 947,000,000 18,797 Total Philippines (Cost $18,896) 18,797 SERBIA 1.5% Government Bonds 1.5% Republic of Serbia, 5.75%, 7/21/23 2,223,160,000 23,628 Republic of Serbia, 10.00%, 2/5/22 708,250,000 8,651 Total Serbia (Cost $29,340) 32,279 SOUTH AFRICA 1.8% Government Bonds 1.8% Republic of South Africa, 10.50%, 12/21/26 441,840,000 39,922 Total South Africa (Cost $34,678) 39,922 SPAIN 1.1% Corporate Bonds 1.1% CaixaBank, VR, 2.75%, 7/14/28 (3) 9,000,000 10,981 24

27 (Cost and value in $000s) Par/Shares $ Value Santander Consumer Finance, 1.50%, 11/12/20 11,000,000 13,684 Total Spain (Cost $24,309) 24,665 SUPRANATIONAL 2.5% Government Bonds 2.5% European Bank for Reconstruction and Development 5.75%, 3/19/18 (INR) 372,800,000 5,837 European Bank for Reconstruction and Development 6.40%, 3/4/19 (INR) 1,752,100,000 27,512 European Investment Bank, 6.60%, 3/4/19 (INR) 103,700,000 1,638 International Bank for Reconstruction & Development 5.75%, 10/28/19 (INR) 597,900,000 9,349 International Bank for Reconstruction & Development 6.375%, 8/7/18 (INR) 233,300,000 3,665 International Finance, 6.45%, 10/30/18 (INR) 417,600,000 6,577 Total Supranational (Cost $53,976) 54,578 SWEDEN 6.7% Corporate Bonds 6.7% Nordea Hypotek, 1.00%, 4/8/22 443,000,000 54,945 Nordea Hypotek, 1.25%, 5/19/21 528,500,000 66,472 Swedbank Hypotek, 1.00%, 6/15/22 200,700,000 24,871 Total Sweden (Cost $144,913) 146,288 SWITZERLAND 0.6% Corporate Bonds 0.6% UBS, 2.45%, 12/1/20 (USD) (4) 13,535,000 13,486 Total Switzerland (Cost $13,524) 13,486 25

28 (Cost and value in $000s) THAILAND 2.9% Par/Shares $ Value Government Bonds 2.9% Kingdom of Thailand, 1.25%, 3/12/28 747,316,573 22,294 Kingdom of Thailand, 2.125%, 12/17/26 441,100,000 13,329 Kingdom of Thailand, 3.60%, 6/17/67 362,000,000 11,601 Kingdom of Thailand, 4.00%, 6/17/66 70,850,000 2,475 Kingdom of Thailand, 4.85%, 6/17/61 8,029, Kingdom of Thailand, 4.875%, 6/22/29 314,330,000 11,853 Total Thailand (Cost $60,913) 61,880 TURKEY 4.8% Government Bonds 4.8% Republic of Turkey, 11.00%, 3/2/22 405,390, ,206 Total Turkey (Cost $103,864) 103,206 UNITED KINGDOM 0.8% Corporate Bonds 0.5% Virgin Media, 6.25%, 3/28/29 7,425,000 10,730 Government Bonds 0.3% 10,730 Government of the United Kingdom, 3.50%, 7/22/68 3,340,000 7,536 7,536 Total United Kingdom (Cost $17,802) 18,266 UNITED STATES 23.7% Asset-Backed Securities 0.4% AmeriCredit Automobile Receivables Trust, Series Class A3, 1.53%, 7/8/21 1,855,000 1,843 Avis Budget Rental Car Funding, Series A, Class A 2.50%, 7/20/21 (4) 1,830,000 1,828 26

29 (Cost and value in $000s) Par/Shares $ Value Mercedes-Benz Auto Lease Trust, Series 2016-A, Class A4 1.69%, 11/15/21 1,835,000 1,833 Santander Retail Auto Lease Trust, Series 2017-A, Class A3 2.22%, 1/20/21 (4) 2,995,000 2,986 Corporate Bonds 2.4% 8,490 Bank of America, FRN, 3M USD LIBOR %, 2.205%, 4/1/19 170, Becton Dickinson & Company, 0.368%, 6/6/19 (EUR) 2,290,000 2,756 Boardwalk Pipelines, 4.45%, 7/15/27 5,710,000 5,792 Boardwalk Pipelines, 5.95%, 6/1/26 560, Broadcom, 2.20%, 1/15/21 (4) 5,985,000 5,855 Capital One Financial, 2.40%, 10/30/20 4,755,000 4,717 Carnival, 1.125%, 11/6/19 (EUR) 5,785,000 7,076 Citigroup, FRN, 3M USD LIBOR %, 3.116%, 5/15/18 360, Citizens Bank, 2.25%, 10/30/20 7,200,000 7,128 Delta Air Lines, 2.875%, 3/13/20 1,655,000 1,663 JPMorgan Chase, 4.625%, 5/10/21 13,000,000 13,843 Martin Marietta Material, FRN, 3M USD LIBOR % 2.096%, 5/22/20 250, McDonalds, 4.00%, 2/17/21 (EUR) 100, NVidia, 2.20%, 9/16/21 980, Non-U.S. Government Mortgage-Backed Securities 0.3% 51,342 Nationstar Home Equity Loan Trust, Series A, Class A 2.013%, 8/25/26 (4) 48, Towd Point Mortgage Trust, Series , Class A1, CMO, ARM 2.75%, 10/25/57 (4) 5,904,930 5,884 U.S. Treasury Obligations 20.6% 5,932 U.S. Treasury Bonds, 3.00%, 5/15/47 41,241,000 43,355 27

30 (Cost and value in $000s) Par/Shares $ Value U.S. Treasury Inflation-Indexed Notes, 0.125%, 4/15/22 407,687, , ,985 Total United States (Cost $514,396) 513,749 SHORT-TERM INVESTMENTS 3.4% Money Market Funds 3.4% T. Rowe Price Government Reserve Fund, 1.24% (5)(6) 73,930,136 73,930 Total Short-Term Investments (Cost $73,930) 73,930 (Amounts in 000s, except for contracts) OPTIONS PURCHASED 0.0% OTC Options Purchased 0.0% Counterparty Description Contracts Notional Amount Value Barclays Capital BNP Paribas Citigroup Global Markets Citigroup Global Markets JPMorgan Chase JPMorgan Chase Morgan Stanley KRW Put/USD Call, 1, (KRW) (2) 1 23,400 $ 20 EUR Put/USD Call, (USD) (2) 1 69, EUR Put/USD Call, (USD) (2) 1 7,200 4 EUR Put/USD Call, (USD) (2) 1 7,200 9 Credit Default Swap, Protection Bought (Relevant Credit: Markit CDX.HY-S29, 5 Year Index, 12/20/22) Pay 5.00% Quarterly, Receive upon credit default, 1.07%* (2) 1 107, Credit Default Swap, Protection Bought (Relevant Credit: Markit CDX.HY-S29, 5 Year Index, 12/20/22) Pay 5.00% Quarterly, Receive upon credit default, 1.075%* (2) 1 107, EUR Put/USD Call, (USD) (2) 1 69,

31 (Cost and value in $000s) Par/Shares $ Value Morgan Stanley Morgan Stanley Standard Chartered Standard Chartered KRW Put/USD Call, 1, (KRW) (2) 1 54, KRW Put/USD Call, 1, (KRW) (2) 1 22, KRW Put/USD Call, 1, (KRW) (2) 1 95, KRW Put/USD Call, 1, (KRW) (2) 1 22, Total Options Purchased (Cost $2,480) 550 Total Investments in Securities 96.3% of Net Assets (Cost $2,068,617) $ 2,091,969 Country classifications are generally based on MSCI categories or another unaffiliated third party data provider; Par/Shares and Notional Amount are denominated in the currency of the country presented unless otherwise noted. * Exercise Spread (1) In default with respect to payment of interest. (2) Non-income producing (3) 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. (4) 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 $30,087 and represents 1.4% of net assets. (5) Seven-day yield (6) Affiliated Company 3M CZK PRIBOR Three month CZK PRIBOR (Prague interbank Offered Rate) 3M EURIBOR The Euro Interbank Offered Rate 3M GBP LIBOR Three month GBP LIBOR (London Interbank Offered Rate) 3M HKD HIBOR Three month HKD HIBOR (Hong Kong interbank Offered Rate) 3M HUF BUBOR Three month HUF BUBOR (Budapest interbank Offered Rate) 3M USD LIBOR Three month USD LIBOR (London Interbank Offered Rate) 7D ARPP Argentina Central Bank seven day repo reference rate ARM Adjustable Rate Mortgage; rate shown is effective rate at period-end. The rates for certain ARMs are not based on a published reference rate and spread but may be determined using a formula based on the rates of the underlying loans. AUD Australian Dollar BDLRPP Argentina deposit rates (Badlar) at private banks BRL Brazilian Real CAD Canadian Dollar CLP Chilean Peso 29