ANNual REPORT May 31, 2017 PRSNX PRSAX PGMSX T. Rowe Price Global Multi-Sector Bond Fund Global Multi-Sector Bond Fund Advisor Class Global Multi-Sector Bond Fund I Class The fund invests in longer-maturity bonds across many asset classes at home and abroad for high current income.
HIGHLIGHTS Yields on high-quality global government bonds of developed markets increased from ultralow or negative levels, driven by anticipation of an eventual unwinding of the accommodative policies of central banks as well as the potential for expansionary fiscal policy following the U.S. presidential election. The U.S. dollar was mixed versus most other developed market currencies in the 12 months ended May 31, 2017, while many emerging market currencies recovered from selling pressure following the U.S. election to post gains against the dollar. The Global Multi-Sector Bond Fund outperformed its market benchmark and its Lipper peer group average over the 12-month period. We are mindful of a number of risks that could trigger volatility and end the recent calm in the markets, and we have positioned the portfolio with modest levels of credit risk and relatively high allocations to more liquid, higher-quality sectors. The views and opinions in this report were current as of May 31, 2017. 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 Email 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.
Manager s Letter Fellow Shareholders Yields on high-quality global sovereign bonds increased over the course of the 12-month reporting period, with the move to higher rates most pronounced in U.S. Treasuries following the U.S. presidential election in November. Signs of healthier global economies convinced investors to anticipate an eventual end to the accommodative policies of central banks in developed markets, which helped push yields higher. High yield bonds produced solid gains, supported by commodity prices recovering from early-2016 lows, as well as slow but steady economic growth. Despite a sell-off after the election in the U.S., emerging market debt also generated strong returns. Performance Comparison The Global Multi-Sector Bond Fund returned 5.98% for the 12 months ended May 31, 2017, easily outperforming the Bloomberg Barclays Multiverse USD Hedged Index, which returned 2.37%. (Results for Advisor and I Class shares may vary, reflecting their different fee structures.) Duration positioning, security selection, and sector allocation decisions all contributed to the fund s relative performance. The fund also outperformed the Lipper Global Income Funds Average and ranked favorably in the Lipper universe over both shorter- and longer-term periods. Based on cumulative total return, the Global Multi-Sector Bond Fund ranked 46 of 213, 21 of 198, 6 of 161, and 18 of 105 funds in the Lipper global income funds group for the one-, three-, and five-year and month-end since-inception periods ended May 31, 2017, respectively. (The Lipper since-inception ranking was calculated from 12/31/08 through 5/31/17. Past performance cannot guarantee future results.) As shown in the Growth of $10,000 chart 1
What Rising Rates Mean for Bonds With the Federal Reserve expected to continue its measured approach to interest rate hikes, yields on U.S. Treasuries and other fixed income securities have slowly increased from the low levels of the recent past. We expect the Fed to pause after each increase in the federal funds rate and to carefully analyze incoming U.S. economic data to be sure that economic activity is strong enough to withstand further incremental moves toward normalization of monetary policy. The Fed s more gradual approach to interest rate increases than in previous cycles nonetheless brings the risk of rising rates to the forefront for bond investors. Higher interest rates weigh on the prices of most types of bonds. Importantly, investors also need to understand that not all bonds or bond funds respond uniformly in such an environment. In particular, the duration of a bond or bond fund, which is tied in part to its maturity, provides important information about how the asset will perform when rates change. Also, some bond sectors and bonds of varying quality are better insulated from rate changes and may even perform well as rates rise. A bond fund s duration (shown in the Portfolio Characteristics exhibit) is the most precise indicator of how the fund will respond to rising rates. If a bond fund has a duration of 5.3 years, for example, the fund s net asset value (NAV) would be expected to fall about 5.3% for every one-percentage-point rise in rates. Even this is only part of the picture, however rising rates will also generally mean higher dividends per share as the fund invests in new, higher-yielding bonds. As a result, the fund s total return (change in NAV plus dividend income) is unlikely to fall as steeply as the duration indicates. Generally, bond funds with a shorter weighted average maturity in other words, those with holdings that come due sooner have lower durations and should fare better than funds with longer average maturities when rates rise. This is because investors in the bonds will not be locked into lower yields, or coupon payments, for long. When the fund receives principal payments from maturing bonds, it can reinvest them at a higher yield. Indeed, for investors in a bond fund with a low duration and a low weighted average maturity, higher rates can mean an increase in income potential. Some fixed income sectors offer an added degree of protection from rising rates. Floating rate funds invest in bank loans where the interest rate on the loan is periodically reset, meaning that investors face very little interest rate risk. However, the bank loans usually have a credit profile that is below investment quality, which means these investments may have greater exposure to default risk than investment-grade bonds. Mortgage-backed securities typically fare better than other bonds of similar maturity when rates rise modestly, as fewer homeowners will refinance and pay off their loans early. In addition, lower-quality bonds with a price that is highly sensitive to the issuer s credit rating (shown in the Quality Diversification exhibit) may perform better as rates increase. Rising rates often accompany a strengthening economy, which can lead to credit upgrades for lower-rated issuers. Also, the higher yields offered by lower-quality bonds provide an additional cushion to total return if bond prices fall as interest rates increase. However, lower-quality bonds are generally exposed to greater credit risk than other bonds because the securities carry a higher risk of default. 2
Performance Comparison Total Return Periods Ended 5/31/17 6 Months 12 Months Global Multi-Sector Bond Fund 5.06% 5.98% on page 17, the fund s longer-term performance compares favorably with both the benchmark and its peers since its inception in December 2008. Global Multi-Sector Bond The fund is a highly Fund Advisor Class 5.04 5.72 diversified fixed income Global Multi-Sector Bond Fund I Class Bloomberg Barclays Multiverse USD Hedged Index Bloomberg Barclays Global Aggregate ex Treasury Bond USD Hedged Index 5.26 2.31 2.76 6.16 2.37 3.03 portfolio that invests in a broad range of securities: domestic and foreign, developed and emerging markets, higher-risk and higher-quality, government-issued, Linked Performance corporate, and Benchmark* 2.59 2.86 securitized bonds. The fund represents a more Lipper Global Income Funds Average 4.39 3.25 aggressive diversified bond portfolio than many other * The linked performance benchmark reflects the T. Rowe Price offerings performance of the Bloomberg Barclays Global Aggregate ex Treasury Bond USD Hedged Index to due to its substantial 1/31/17 and the performance of the Bloomberg allocation flexibility across Barclays Multiverse USD Hedged Index from 2/1/17 forward. sectors and foreign bonds and our willingness to deviate significantly from the benchmark when we perceive attractive opportunities. However, the portfolio is designed to typically be less volatile than bond funds concentrated in a single higher-risk sector, such as high yield. On February 1, 2017, the fund s benchmark changed from the Bloomberg Barclays Global Aggregate ex-treasury Bond USD Hedged Index to the Bloomberg Barclays Multiverse USD Hedged Index. The new benchmark represents a broader universe and is more reflective of the types of securities in which the fund invests. The new benchmark does not impact how the portfolio is managed. 3
Market Environment After growing 1.6% in 2016, U.S. gross domestic product (GDP) growth slowed to a 1.2% annual pace in the first three months of 2017, according to the Commerce Department s second estimate. While first-quarter growth was weak, the underlying trend of moderate U.S. economic expansion is expected to remain in place. The pace of employment growth has moderated compared with the last few years as the unemployment rate has declined, but the labor market remains strong and wage growth has picked up. Inflation is higher than 12 months ago, but any further increases are likely to be gradual as energy prices have leveled off. Citing an improving labor market and rising inflation, the Fed raised interest rates by 25 basis points in December 2016 and March 2017. After the pair of hikes, the range for the fed funds target rate was 0.75% to 1.00%. (The Fed also raised rates in June, shortly after the end of the reporting period.) Following the UK s late June 2016 Brexit vote to leave the European Union, the Bank of England (BoE) cut interest rates for the first time since 2009 and resumed purchases of corporate bonds. The BoE held rates steady through the rest of the reporting period as the timing and mechanics of Brexit remained uncertain. In the eurozone, 2017 elections in the Netherlands and France resulted in losses for euroskeptic candidates, reducing fears of populist efforts to break up the shared currency. The European Central Bank (ECB) kept its benchmark lending rate at 0.0% and maintained its aggressive bond purchases. However, signs of renewed economic health in the eurozone began to emerge in 2017, as the region s GDP expanded at a relatively vigorous 1.9% annual rate in the first quarter. This led market participants to anticipate that the ECB could begin to scale back its accommodative policies later in the year or early next year. On the other hand, Japan s economy remained mired in sluggish growth, and the Bank of Japan (BoJ) eliminated its target for monetary base expansion and modified its government bond purchase program to target a 0% yield on the 10-year note. Growth in emerging markets as a whole continued to outpace developed countries. The price of Brent crude, the global oil benchmark, started and ended the reporting period at approximately $49 per barrel but traded as low as $40 last summer and as high as $55 in early 2017. These prices were still well above the sub-$30 levels in early 2016 and provided support for economies that are highly dependent on commodity exports, such as Russia and Venezuela. On the other hand, oil prices were also well below their highs over $100 in 2014, 4
Credit Ratings in a Nutshell Credit rating agencies assign letter ratings to bonds after analyzing the issuer s financial situation, although some issuers choose not to be rated. The chart below shows the range of ratings used by Moody s Investors Service, Standard & Poor s, and Fitch Ratings. Bonds within the four highest rating categories are considered to be investment grade; those with lower ratings are considered noninvestment grade and are often called high yield or junk bonds. There are also intermediate gradations called split ratings; these occur when two of the rating agencies do not agree on a rating. For example, one agency may rate a bond BB and another B, creating a BB/B split rating. Moody s and Standard & Poor s/fitch Rating Codes Investment-Grade Bonds Moody s S&P/Fitch Meaning Aaa AAA Highest-quality bonds. Issuers are considered extremely stable and dependable. Aa AA High-quality bonds. The long-term investment risk is slightly higher than on AAA bonds. A A Bonds with many favorable attributes. Baa BBB Medium-grade bonds. Quality is adequate at present but less certain for the long term. Noninvestment-Grade Bonds Ba BB Bonds with a speculative element. B B Security of payments is not well safeguarded. Caa CCC Ca CC Bonds are extremely speculative. The danger of a default is high. C C D In default. a period that hurt oil importers, such as India and Indonesia. China s GDP expanded at a 6.9% rate in the first quarter of 2017 from the year-earlier quarter after growing 6.7% for the full year 2016, within the target range of 6.5% to 7.0%. Brazil s economy expanded in the first quarter of 2017 as President Michel Temer made meaningful progress toward implementing fiscal reforms that better position the country following a severe recession. However, near the end of the reporting period, allegations against Temer increased uncertainty around the outlook for key fiscal reforms. 5
The monetary policies of emerging market central banks diverged in response to their varying economic growth trajectories and economic linkages. Brazil s central bank started lowering interest rates in October 2016 its first rate cut in four years as receding inflation gave the central bank room to act to stimulate the economy. The bank steadily Global Bond Market Returns Periods Ended 5/31/17 Total Return 6 Months 12 Months Credit Suisse High Yield Index 6.49% 14.35% J.P. Morgan Emerging Markets Bond Index Plus 8.09 8.90 Bloomberg Barclays U.S. Corporate Investment-Grade Bond Index 4.17 4.26 eased monetary policy through the end of the reporting period. On the other hand, the Bank of Mexico raised its lending rate multiple times as inflationary pressures rose and the peso fell amid fears that the U.S. would impose more punitive terms of trade on Mexico. Bloomberg Barclays CMBS Yields on developed ERISA-Eligible Index 2.12 1.74 market government debt Bloomberg Barclays Asset moved in both directions Backed Securities Index 1.06 1.54 during the period but Bloomberg Barclays U.S. Mortgage Backed Securities Index Bloomberg Barclays U.S. Agency Bond Index Bloomberg Barclays U.S. Treasury Bond Index 1.75 1.58 1.93 1.16 1.04 0.00 generally increased, with the move to higher rates most pronounced in U.S. Treasuries. The 10-year U.S. Treasury yield hit a record low of 1.36% in early July Bloomberg Barclays Global following an unexpectedly Aggregate ex USD Bond Index 5.19-0.04 weak employment report and the flight to quality in the immediate aftermath of the Brexit vote. But U.S. Treasury yields began increasing as economic data improved over the summer and moved sharply higher after the presidential election as investors anticipated that the Trump administration would push through tax cuts and increase infrastructure spending. The yield on the 10-year U.S. Treasury note reached 2.62% in March before decreasing to 2.20% at the end of May as hopes for a quick implementation of these policies faded. 6
4.00% 3.00 2.00 1.00 0.00-1.00 In the eurozone, the German 10-year bund yield dipped into negative territory early in the reporting period when the market consensus seemed to be that global central banks would maintain or even expand their accommodative policies. However, later in the period, speculation that the ECB would begin tapering its asset purchases pushed the bund yield up to nearly 0.50% before ending the period at around 0.30%. The yield on the Japanese 10-year 10-Year German Government Bond Yield sovereign note followed 10-Year UK Government Bond Yield a similar trajectory early 10-Year Japanese Government Bond Yield in the period, although 10-Year Treasury Note Yield the BoJ targeting the yield at 0% at the end of November caused low volatility around that level for the remainder of the period. Interest Rate Levels 5/31/16 8/16 11/16 2/17 5/31/17 Source: J.P. Morgan. Emerging market sovereign yields were less correlated with each other, given the differing monetary policies and political situations across individual countries. Yields on Mexico s government debt increased in the runup to the U.S. presidential election and jumped higher immediately after Trump s victory. Yields on Brazilian sovereign bonds steadily decreased over most of the reporting period as inflation declined, before spiking higher following the allegations against Temer. Russian government bonds benefited as inflation declined, pushing yields lower. Higher oil prices also boosted the Russian ruble postelection; the ruble gained nearly 18% against the U.S. dollar over the reporting period. The Brazilian real posted strong performance as well, rising about 11% versus the dollar despite selling pressure late in the period. While many other emerging market currencies performed well against the U.S. dollar, the Turkish lira moved against the broad trend by falling more than 16% for the reporting period after the country experienced a failed coup in July 2016 and inflationary pressures increased. The U.S. dollar was mixed versus the currencies of many major developed markets with the exception of the British pound sterling, which plummeted nearly 11% versus the dollar in the 12-month period after hitting a record low after the Brexit vote. 7
U.S. high yield bonds rallied throughout the reporting period, benefiting from commodity prices stabilizing above recent lows. Anticipation of expansionary fiscal policies also helped boost the high yield market. Noninvestment-grade bonds from issuers in the metals and mining industry and other commodity-related businesses, which account for a significant proportion of the U.S. high yield market, performed particularly well. In contrast, these industries make up a considerably smaller amount of the European high yield market, which led European noninvestment-grade bonds to lag their U.S. counterparts. U.S. and European investment-grade bonds generated more restrained returns as a result of their lower yields and longer durations as yields on government bonds increased. Asset-backed securities and mortgage-backed securities (MBS) gained only modestly amid the increase in Treasury yields; uncertainty about the Fed s plans for winding down its holdings of MBS also weighed on that sector. Dollar-denominated emerging market debt posted healthy returns for the reporting period despite selling off after the U.S. presidential election. Emerging market bonds denominated in local currencies performed better as rates broadly declined and many emerging market currencies gained against the U.S. dollar. Performance and Investment Review Interest rate positioning, security selection, and sector allocation all contributed to the fund s relative performance. The fund benefited from a position in Brazil local bonds as interest rates experienced a large decline during the majority of the reporting period, driven by lower inflation. Another contributor was an underweight to eurozone duration as yields on the region s government bonds increased from ultralow levels due to better growth and the potential for removal of policy accommodation. Security selection in emerging markets, including positions in oil-related quasi-sovereign bonds, also benefited relative returns. In terms of sector allocation, an overweight to high yield bonds, which were among the strongest-performing fixed income sectors, contributed to relative performance, as did an underweight to the lagging MBS sector. On the currency side, a short position in the British pound was a positive as the Brexit vote surprised markets and the currency sold off. Offsetting the positive factors was an underweight to investment-grade corporate bonds in both the U.S. and the eurozone, as the sector performed well along with other credit sectors. An underweight to Japanese interest rates also was a modest detractor. While interest 8
Portfolio Characteristics Six-Month Period Ended 11/30/16 5/31/17 Global Multi-Sector Bond Fund Share Price $11.05 $11.41 rates increased, they rose less than in most other developed markets due to the BoJ s targeted interest rate policy. Dividends Per Share At the beginning of the For 6 Months 0.19 0.20 reporting period, the For 12 Months 0.38 0.39 fund was conservatively SEC Yield (30-day) 3.67% 3.28% positioned with a Global Multi-Sector Bond relatively low level of Fund Advisor Class $11.05 $11.42 risk compared with Dividends Per Share its history, with a For 6 Months 0.18 0.18 meaningful allocation to For 12 Months 0.35 0.36 global developed market SEC Yield (30-day) 3.35% 3.19% sovereign bonds. The portfolio s overall duration Global Multi-Sector Bond was shorter than that Fund I Class of the benchmark, with Share Price $11.04 $11.41 most of the short-duration Dividends Per Share positioning in developed For 6 Months 0.20 0.21 markets. After the sharp For 12 Months 0.40 post-brexit rally in SEC Yield (30-day) 3.99% 3.59% global developed market Weighted Average Maturity (years) 6.9 7.3 government debt drove Weighted Average Effective yields to record lows, Duration (years) 4.9 5.8 we further reduced the fund s duration relative to 12-month dividends may not equal the combined 6-month figures due to rounding. the benchmark. We also maintained meaningful allocations to high yield bonds and bank loans, though somewhat lower than historical levels as valuations were less compelling. But these sectors tend to hold up better in an environment of rising interest rates than investmentgrade bonds, and they tend to perform well in a slow-growth, low-volatility environment. In October, we boosted the portfolio s allocation to locally denominated emerging market debt, funding the increase by selling developed market sovereigns. In the emerging market local sector, we continued to favor bonds from countries with stronger reform and growth prospects, including Brazil, Indonesia, and Serbia. We generally increased the allocation to locally denominated emerging 9
Quality Diversification Reserves 8% Not Rated 4% B Rated and Below 16% BB Rated 21% Based on net assets as of 5/31/17. U.S. Government Agency Securities* 8% U.S. Treasury Securities** 3% A Rated and Above 21% BBB Rated 19% *U.S. government agency securities are issued or guaranteed by a U.S. government agency and may include conventional pass-through securities and collateralized mortgage obligations; unlike Treasuries, government agency securities are not issued directly by the U.S. government and are generally unrated but may have credit support from the U.S. Treasury (e.g., FHLMC and FNMA issues) or a direct government guarantee (e.g., GNMA issues). Therefore, this category may include rated and unrated securities. market bonds over the reporting period and lengthened duration where we saw opportunities to benefit from relatively high real yields as well as lower inflation and central bank easing in countries such as Brazil and Russia. We eliminated exposure to the Mexican peso following the U.S. presidential election but added back after the postelection selloff made it attractively valued against the dollar. By the end of the reporting period, the fund had a sizable allocation to global sovereign bonds, **U.S. Treasury securities are issued by the U.S. Treasury providing liquidity and and are backed by the full faith and credit of the U.S. flexibility in case of a government. The ratings of U.S. Treasury securities are dislocation in more derived from the ratings on the U.S. government. credit-intensive sectors. Sources: Moody s Investors Service; if Moody s does not rate a security, then Standard & Poor s (S&P) is used The portfolio was longer as a secondary source. When available, T. Rowe Price will in duration relative to use Fitch for securities that are not rated by Moody s or the benchmark in U.S. S&P. T. Rowe Price does not evaluate these ratings but Treasuries, which would simply assigns them to the appropriate credit quality likely benefit from selling category as determined by the rating agency. pressure in riskier sectors. We added meaningful exposure to French sovereigns prior to the late-april French elections, and the fund added exposure to Italian government bonds, given their attractive yields. However, the fund had little exposure to UK government debt near the end of the reporting period. We expect to continue to tactically shift these global sovereign positions as valuations and opportunities evolve. 10
Security Diversification Percent of Net Assets 11/30/16 5/31/17 Emerging Markets (Local Currency) 26% 28% Global Sovereign 19 18 U.S. Mortgage 11 11 Emerging Markets (U.S. Dollars) 9 8 Bank Loans 8 7 High Yield 8 7 U.S. Investment-Grade Corporate Bonds 8 7 U.S. Asset-Backed Securities 2 2 U.S. Commercial Mortgage- Backed Securities 2 2 Euro Corporate 2 2 Other and Reserves 5 8 Total 100% 100% The fund s exposure to credit sectors remained modest relative to its history, and we maintained a hedge against European credit risk via the derivatives market. The portfolio also had a meaningful allocation to emerging market local bonds, where we favored exposure to countries such as Mexico, Malaysia, and Israel. In terms of currency positioning, the fund was long the euro and the Serbian dinar, an out-of-benchmark currency that appears undervalued. We were short the South Korean won and the Taiwan dollar as hedges against the risk of conflict on the Korean Peninsula or an abrupt downturn in China. When determining portfolio allocation targets among the various fixed income sectors, we actively consider both current and potential future liquidity. U.S. Treasuries and the sovereign debt of other developed markets, such as Germany and the UK, are typically very liquid. However, liquidity tends to decrease in sectors with increasing amounts of credit risk. Emerging market corporate bonds is an example of a sector that can be difficult to buy or sell efficiently in a flight-to-quality environment. The fund maintains material holdings in various types of derivatives, primarily for hedging risk or gaining exposure to certain sectors or currencies. We also use currency derivatives to hedge foreign currency exposure, reducing risk versus the benchmark, which consists entirely of bonds denominated in, or hedged to, U.S. dollars. This hedging is an integral part of our purchases of nondollar bonds. During some time periods (such as the first six months of the reporting period), the currency hedging component has a positive effect on absolute 11
performance. However, the fund s exposure to currency derivatives detracted slightly from absolute performance during the 12-month period as the dollar generally underperformed the foreign currencies we were hedging. Outlook We anticipate that the U.S. economy will continue to expand at a relatively slow 2.0% to 2.5% annual pace, allowing the Fed to maintain its gradual interest rate normalization. Following its rate increase in June, at least one additional interest rate hike from the U.S. central bank before the end of 2017 seems likely. Given the recent signs of economic improvement in the eurozone, we expect the ECB in the second half of 2017 to announce plans to reduce some monetary accommodation in 2018. However, the BoJ appears further away from normalizing its monetary policy. The path of the U.S. dollar is less certain, having leveled off after a multiyear run of strength, although more Fed tightening than the market currently expects, combined with stronger growth, would likely push the dollar higher. The most notable aspect of markets recently has been an absence of volatility. But we are mindful of a number of risks that could end the complacency. A quicker-than-expected ECB move to wind down its quantitative easing or normalize interest rates could trigger a risk sell-off, particularly if combined with an expectedly aggressive path of rate hikes from the Fed. Geopolitical risks, such as those related to the current tensions on the Korean Peninsula and in the Middle East, could also prove meaningful to markets. Political events in developed markets, including Italian elections, the Brexit process in the UK, and the Trump administration s efforts to implement expansionary fiscal policies, could increase volatility. An abrupt economic slowdown in China remains a risk as the country s government moves to slowly tighten policy, but a controlled deceleration in Chinese growth remains the most likely scenario according to our economists and sovereign debt analysts. 12
With these factors in mind, we anticipate keeping the overall level of risk in the portfolio relatively modest over the near term. Our conservative positioning, with lower relative exposure to sectors with corporate credit risk and larger allocations to emerging market local bonds and global sovereigns, should provide the portfolio with the liquidity and diversification to weather a surge in volatility. Liquidity is important in providing the flexibility to reallocate efficiently as risk events occur and market valuations bring opportunities. With relative value opportunities across sectors still limited, we expect the majority of near-term tactical opportunities to come from interest rates and currencies. We are confident that T. Rowe Price s team of sector-specific credit analysts can help us navigate credit sectors, while our economists and sovereign debt analysts provide insights on individual countries that drive our interest rate and currency allocations. In this uncertain environment, we believe that our strengths in identifying return opportunities and risks, actively adjusting our portfolio allocations, and performing fundamental credit analysis will allow us to continue to generate solid long-term performance for our shareholders. Thank you for investing with T. Rowe Price. Respectfully submitted, Steven C. Huber Chairman of the fund s Investment Advisory Committee June 21, 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. 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. MBS 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. Investing in the securities of non-u.s. issuers involves special risks not typically associated with investing in U.S. issuers. Foreign securities tend to be more volatile and less liquid than investments in U.S. securities and may lose value because of adverse local, political, social, or economic developments overseas or due to changes in the exchange rates between foreign currencies and the U.S. dollar. In addition, foreign investments are subject to settlement practices and regulatory and financial reporting standards that differ from those of the U.S. These risks are heightened for the fund s investments in emerging markets, which are more susceptible to governmental interference, less efficient trading markets, and the imposition of local taxes or restrictions on gaining access to sales proceeds for foreign investors. Glossary Bloomberg Barclays Asset-Backed Securities Index: Tracks the performance of securities backed by assets including credit card, home equity, and auto loans. Bloomberg Barclays Commercial Mortgage-Backed Securities (CMBS) ERISA-Eligible Index: An unmanaged index that tracks the performance of commercial mortgagebacked securities. Bloomberg Barclays Global Aggregate ex-treasury Bond U.S. Dollar Hedged Index: Tracks the global investment-grade fixed rate debt markets, excluding U.S. Treasury securities, and is hedged to the dollar. 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. Bloomberg Barclays Multiverse U.S. Dollar Hedged Index: Tracks the performance of the global fixed income market, including both investment-grade and high yield bonds. 14
Glossary (continued) Bloomberg Barclays U.S. Agency Bond Index: Tracks the performance of securities issued by U.S. agencies such as Fannie Mae (FNMA), Freddie Mac (FHLMC), and the Federal Home Loan Bank. 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. Mortgage Backed Securities Index: An index that tracks the performance of the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Bloomberg Barclays U.S. Treasury Bond Index: An unmanaged index of publicly traded obligations of the U.S. Treasury. Basis point: Equivalent to 0.01 percentage points. 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. Lipper averages: The averages of available mutual fund performance returns for specified time periods in categories defined by Lipper Inc. 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. 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. Money funds must maintain a weighted average maturity of less than 60 days. 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. 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. GLOBAL MULTI-SECTOR BOND FUND $30,000 26,000 22,000 18,000 14,000 10,000 As of 5/31/17 Global Multi-Sector Bond Fund $17,945 Bloomberg Barclays Multiverse USD Hedged Index $14,661 Bloomberg Barclays Global Aggregate ex Treasury Bond USD Hedged Index $15,087 Linked Performance Benchmark* $15,062 Lipper Global Income Funds Average $14,588 12/15/08** 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 Note: Performance for the Advisor and I Classes will vary due to their differing fee structure. See returns table below. *The linked performance benchmark reflects the performance of the Bloomberg Barclays Global Aggregate ex Treasury Bond USD Hedged Index to 1/31/17 and the performance of the Bloomberg Barclays Multiverse USD Hedged Index from 2/1/17 forward. **Lipper data begin at 12/31/08. Average Annual Compound Total Return Since Inception Periods Ended 5/31/17 One Year Five Years Inception Date Global Multi-Sector Bond Fund 5.98% 4.53% 7.16% 12/15/08 Global Multi-Sector Bond Fund Advisor Class 5.72 4.32 6.98 12/15/08 Global Multi-Sector Bond Fund I Class 6.16 6.96 3/23/16 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. 17
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, the 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. 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. 18
Fund Expense Example (continued) Global Multi-Sector Bond Fund Beginning Ending Expenses Paid Account Value Account Value During Period* 12/1/16 5/31/17 12/1/16 to 5/31/17 Investor Class Actual $1,000.00 $1,050.60 $3.58 Hypothetical (assumes 5% return before expenses) 1,000.00 1,021.44 3.53 Advisor Class Actual 1,000.00 1,050.40 4.65 Hypothetical (assumes 5% return before expenses) 1,000.00 1,020.39 4.58 I Class Actual 1,000.00 1,052.60 2.56 Hypothetical (assumes 5% return before expenses) 1,000.00 1,022.44 2.52 * 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 (182), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.70%, the Advisor Class was 0.91%, and the I Class was 0.50%. 19
Quarter-End Returns Since Inception Periods Ended 3/31/17 One Year Five Years Inception Date Global Multi-Sector Bond Fund 5.78% 3.96% 7.09% 12/15/08 Global Multi-Sector Bond Fund Advisor Class 5.49 3.77 6.91 12/15/08 Global Multi-Sector Bond Fund I Class 6.03 6.35 3/23/16 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 1-800-225-5132 or, for Advisor and I Class shares, 1-800-638-8790. 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 Global Multi-Sector Bond Fund 0.83% Global Multi-Sector Bond Fund Advisor Class 1.14 Global Multi-Sector Bond Fund I Class 0.70 The expense ratio shown is as of the fund s fiscal year ended 5/31/16. 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. 20
Financial Highlights For a share outstanding throughout each period Investor Class Year Ended 5/31/17 5/31/16 5/31/15 5/31/14 5/31/13 NET ASSET VALUE Beginning of period $ 11.14 $ 11.24 $ 11.77 $ 11.84 $ 11.52 Investment activities Net investment income (1) 0.39 (2)(4) 0.39 (2) 0.43 (2) 0.43 (3) 0.42 (3) Net realized and unrealized gain / loss 0.27 (0.11) (0.31) 0.09 0.54 Total from investment activities 0.66 0.28 0.12 0.52 0.96 Distributions Net investment income (0.26) (0.26) (0.42) (0.43) (0.44) Net realized gain (0.23) (0.16) (0.20) Tax return of capital (0.13) (0.12) Total distributions (0.39) (0.38) (0.65) (0.59) (0.64) NET ASSET VALUE End of period $ 11.41 $ 11.14 $ 11.24 $ 11.77 $ 11.84 Ratios/Supplemental Data Total return (5) 5.98% (2)(4) 2.63% (2) 1.08% (2) 4.66% (3) 8.46% (3) Ratio of total expenses to average net assets 0.67% (2)(4) 0.71% (2) 0.69% (2) 0.66% (3) 0.66% (3) Ratio of net investment income to average net assets 3.51% (2)(4) 3.56% (2) 3.72% (2) 3.75% (3) 3.53% (3) 21
Financial Highlights For a share outstanding throughout each period Year Ended 5/31/17 5/31/16 5/31/15 5/31/14 5/31/13 Ratios/Supplemental Data (continued) Portfolio turnover rate 111.5% 163.5% 114.1% 137.8% 65.8% Net assets, end of period (in thousands) $ 370,381 $ 302,211 $ 319,745 $ 252,179 $ 292,023 (1) Per share amounts calculated using average shares outstanding method. (2) See Note 6. Excludes expenses permanently waived 0.04%, 0.06%, and 0.06% of average net assets for the years ended 5/31/17, 5/31/16, and 5/31/15, respectively, related to investments in T. Rowe Price mutual funds. (3) See Note 6. Excludes expenses in excess of a 0.80% contractual expense limitation in effect through 9/30/13, and expenses permanently waived 0.09% and 0.12% of average net assets for the years ended 5/31/14 and 5/31/13 respectively, related to investments in T. Rowe Price mutual funds. (4) Excludes expenses waived related to the waiver of fund-level expenses ratably across all classes in accordance with SEC rules. (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. The accompanying notes are an integral part of these financial statements. 22
Financial Highlights For a share outstanding throughout each period Advisor Class Year Ended 5/31/17 5/31/16 5/31/15 5/31/14 5/31/13 NET ASSET VALUE Beginning of period $ 11.15 $ 11.25 $ 11.78 $ 11.84 $ 11.53 Investment activities Net investment income (1) 0.37 (2) 0.36 (2) 0.39 (2) 0.40 (2) 0.39 (2) Net realized and unrealized gain / loss 0.26 (0.10) (0.29) 0.11 0.54 Total from investment activities 0.63 0.26 0.10 0.51 0.93 Distributions Net investment income (0.24) (0.24) (0.40) (0.41) (0.42) Net realized gain (0.23) (0.16) (0.20) Tax return of capital (0.12) (0.12) Total distributions (0.36) (0.36) (0.63) (0.57) (0.62) NET ASSET VALUE End of period $ 11.42 $ 11.15 $ 11.25 $ 11.78 $ 11.84 Ratios/Supplemental Data Total return (3) 5.72% (2) 2.43% (2) 0.88% (2) 4.55% (2) 8.18% (2) Ratio of total expenses to average net assets 0.91% (2) 0.89% (2) 0.88% (2) 0.86% (2) 0.83% (2) Ratio of net investment income to average net assets 3.26% (2) 3.38% (2) 3.47% (2) 3.56% (2) 3.27% (2) Portfolio turnover rate 111.5% 163.5% 114.1% 137.8% 65.8% Net assets, end of period (in thousands) $ 23,726 $ 12,633 $ 5,514 $ 1,916 $ 1,801 (1) Per share amounts calculated using average shares outstanding method. (2) See Note 6. Excludes expenses in excess of a 0.95% contractual expense limitation in effect through 9/30/17, and expenses permanently waived 0.04%, 0.06%, 0.07%, 0.09%, and 0.12% of average net assets for the years ended 5/31/17, 5/31/16, 5/31/15, 5/31/14, and 5/31/13 respectively, related to investments in T. Rowe Price mutual funds. (3) 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. The accompanying notes are an integral part of these financial statements. 23
Financial Highlights For a share outstanding throughout each period I Class Year Ended 5/31/17 3/23/16 (1) Through 5/31/16 NET ASSET VALUE Beginning of period $ 11.14 $ 10.99 Investment activities Net investment income (2) 0.41 (3)(4) 0.08 (3)(4) Net realized and unrealized gain / loss 0.26 0.14 (5) Total from investment activities 0.67 0.22 Distributions Net investment income (0.27) (0.03) Tax return of capital (0.13) (0.04) Total distributions (0.40) (0.07) NET ASSET VALUE End of period $ 11.41 $ 11.14 Ratios/Supplemental Data Total return (6) 6.16% (3)(4) 2.04% (3)(4) Ratio of total expenses to average net assets 0.50% (3)(4) 0.49% (3)(4)(7) Ratio of net investment income to average net assets 3.72% (3)(4) 4.19% (3)(4)(7) 24
Financial Highlights For a share outstanding throughout each period Year Ended 5/31/17 3/23/16 (1) Through 5/31/16 Ratios/Supplemental Data (continued) Portfolio turnover rate 111.5% 163.5% Net assets, end of period (in thousands) $ 30,662 $ 3,368 (1) Inception date (2) Per share amounts calculated using average shares outstanding method. (3) See Note 6. Excludes expenses permanently waived 0.04% and 0.06% of average net assets for the year ended 5/31/17 and the period ended 5/31/16, respectively, related to investments in T. Rowe Price mutual funds. (4) See Note 6. Excludes expenses waived 0.07% and 0.09% of average net assets for the year ended 5/31/17 and the period ended 5/31/16 respectively, related to the contractual operating expense limitation in effect through 9/30/18. (5) 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. (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. 25