T. Rowe Price U.S. Treasury Money Fund

N-CSRS 1 srust.htm T. ROWE PRICE U.S. TREASURY MONEY FUND T. Rowe Price U.S. Treasury Money Fund - November 30, 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number: 811-5860

T. Rowe Price U.S. Treasury Funds, Inc.

(Exact name of registrant as specified in charter)

100 East Pratt Street, Baltimore, MD 21202

(Address of principal executive offices)

David Oestreicher

100 East Pratt Street, Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: (410) 345-2000

Date of fiscal year end: May 31

Date of reporting period: November 30, 2010

Item 1: Report to Shareholders

U.S. Treasury Money Fund

November 30, 2010

The views and opinions in this report were current as of November 30, 2010. 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.

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Manager’s Letter

Fellow Shareholders

U.S. Treasury securities produced strong results over the last six months, particularly early in the period, as concerns mounted that the worst economic crisis in recent memory would continue to produce unwelcome challenges. U.S. unemployment remained stubbornly high and the European debt crisis erupted again, with worsening problems in Ireland; Portugal; and, potentially, Spain. Longer-term Treasury yields declined in response to questions about the strength and viability of the economic recovery, though they began moving higher in the fall as it became clear that the Federal Reserve would implement additional monetary easing to spur growth. Subdued inflation kept short-term Treasury yields at low levels.

ECONOMY AND INTEREST RATES

Markets improved through the fall of 2010, despite some serious speed bumps from the intensifying European sovereign debt crisis and the continuing aftershocks in the U.S. from the housing and financial crises. U.S. unemployment remained stubbornly high, recording its 15th straight month above 9.5% in November, the longest period above that rate since 1930. With little expectation that the jobless rate would dip meaningfully below that level anytime soon, Fed Chairman Ben Bernanke put the problem succinctly, saying that the anemic growth rate was insufficient to materially reduce the jobless rate. Flagging growth and expectations that inflation would remain “contained” prompted the Fed in November to introduce a second round of monetary stimulus, or quantitative easing, dubbed “QE2,” which was intended to increase borrowing and spending by lowering longer-term interest rates.

While the economy’s recovery has been slow, it appears to be gathering momentum. Manufacturing has gained traction, and capacity utilization has risen steadily, which suggests that market demand has grown. However, the figures remain well below levels that would spark inflation. Wage growth, a lagging indicator in an economic recovery, began to increase in the second quarter of 2010 following two years of steady declines. Consumer spending has also rebounded, increasing at a 2.6% annual rate in the third quarter—its fastest pace since the fourth quarter of 2006.

Nonetheless, inflation is well below the Fed’s comfort zone of 2.0% to 3.0% a year. Inflation is projected to be about 1.6% in 2011. The central bank is unlikely to start raising short-term rates, currently in a 0.00% to 0.25% range, until clear signs emerge that core inflation is accelerating and unemployment is receding. The Fed’s decision to introduce additional monetary stimulus in the form of Treasury purchases is widely expected to improve growth rates.

As shown in the Interest Rate Levels graph, intermediate- and long-term U.S. Treasury yields fell in August amid renewed weakness in consumer spending, factory orders, and job growth. Short-term yields also declined. But following the Fed’s November announcement that it will buy $600 billion in medium-term Treasuries, the Treasury yield curve—which illustrates the relationship between the yields and maturities of government securities—steepened sharply, though the gap narrowed somewhat by the end of the month.

MARKET NEWS

For the six-month period, Treasury securities generated solid gains, as concerns mounted over whether the U.S. recovery was self-sustaining given exceptionally low growth rates and stubbornly high unemployment. The European debt crisis entered its second phase in the fall, as Ireland became the latest casualty in an ever-deepening debt strain on the Continent. Questions surfaced about Portugal and Spain and whether the euro could withstand more punishing blows. The European Central Bank announced plans to conduct stress tests on European banks, but short-term investors seemed to take little solace as it became clear that the debt conundrum would take years to play out. The U.S. dollar, which had been declining, reversed course against the weakened euro.

PORTFOLIO REVIEW

U.S. Treasury Money Fund
Your fund returned 0.01% in the six-month period ended November 30, 2010, in line with its Lipper benchmark. It is important to note that Treasury bill yields have remained at such low levels that it has been impossible to buy eligible investments within the money fund’s investment horizon that produce income sufficient to offset the fund’s expenses. As a result, T. Rowe Price continues to waive part of its management fee as needed to support the fund’s yield.

In an effort to provide support to a slow-growing U.S. economy, the Federal Reserve kept its fed funds target rate in the same ultra-low range where it has been since late 2008. The Fed’s target rate of 0.00% to 0.25% anchors the front end of an exceptionally low-yield Treasury money market curve. Investor preference for the safety of the Treasury market remains strong. Indeed, the continued market focus on the European sovereign debt crisis reminds investors that the aftershocks of the financial crisis are still being felt. The protracted resolution of credit excesses of the past and the slow pace of economic recovery suggest that money market rates will remain low for quite some time.

Over the past six months, yields on U.S. Treasury securities in the money market space moved in a narrow range. The benchmark 90-day Treasury bill yield averaged around 0.13%, moving in a range of 0.05% to 0.16%. Longer-dated Treasury obligations moved in similar fashion. The six-month bill rose to an average yield of 0.18%, while ranging over the period from 0.14% to 0.23%. The one-year bill moved in a range of 0.19% to 0.36%, ending the period at 0.25%. While Treasury rates have risen a bit, it is unlikely that yields will move significantly higher in the near term.

Within the portfolio, we continue to find attractive yields by lending into the overnight tri-party Treasury repurchase market. These transactions, which are collateralized in U.S. Treasury securities, continue to offer a yield advantage versus most of the Treasury bill curve. We also have continued to seek additional yield by maintaining positions in bonds issued under the FDIC’s Temporary Loan Guarantee Program (TLGP), which benefits from the full support of the U.S. Treasury.

Recent SEC changes to Rule 2a-7, which governs the management of all money market funds, became effective on May 31, 2010. These changes are designed to strengthen the industry and thereby create further protection for shareholders. Among many changes, money funds are now required to maintain higher levels of liquidity, which can be satisfied with Treasury holdings. This change suggests that non-Treasury money funds will increase their demand for short-dated bills. Another change requires money funds to maintain a much shorter weighted average maturity (WAM). All money funds must now maintain a WAM of 60 days or less. Despite our expectations that rates will remain low for some time—and the fact that the portfolio is already stable given that all of our holdings are backed by the U.S. Treasury—we maintained our positioning at a WAM of 54 days, the same as six months ago.

U.S. Treasury Intermediate Fund
Your fund returned 5.25% for the six-month period ended November 30, 2010. As shown in the Performance Comparison table, the fund outperformed the Lipper peer group average but lagged the Barclays Capital U.S. Treasury 4–10 Year Index. Fund returns in the six-month period reflected $0.08 of dividend income and an increase of $0.23 in the net asset value (NAV), from $5.90 to $6.13.

Credit markets continued to improve in 2010 as investors withdrew from money market funds and increased exposure to bonds. However, risk aversion grew in June due to renewed concerns about the European debt fallout. Liquidity was provided by many types of investors including the Federal Reserve, which announced plans to purchase $600 billion in Treasuries late in the period. Treasury yields, which had been trending higher earlier in the year, fell last summer as it became clear that the Fed would continue to keep the fed funds rate at a historically low level of 0.00% to 0.25%. Yields declined even in the wake of many factors that typically would result in higher yields: a higher budget deficit, better economic data, increased U.S. Treasury supply, and increased investor risk appetite. At the end of our reporting period, the 2-, 5-, and 10-year U.S. Treasury yields were 0.45%, 1.47%, and 2.80%, respectively. We expect the Fed to continue its low rate policy for some time.

Our exposure to Government National Mortgage Association (GNMA) bonds added value, and agency mortgage-backed securities (MBS) enjoyed decent returns over the past six months. The MBS sector cheapened in September 2010 as investors grew concerned about increased mortgage refinancing and fears of a national bailout program, which never materialized. We increased our allocation from 3.5% to 5.0% to benefit from the rebound. During the summer, valuations of MBS became more attractive due to concerns about prepayment and refinancing risks, which had weighed on the sector. But MBS benefited from strong demand and limited supply, which pushed up returns. Our exposure to Treasury inflation protected securities (TIPS) added slightly to performance. In September, we increased the fund’s allocation from 8.5% to 10.0% as valuations became attractive following the Fed’s comments that inflation expectations remained subdued. In October, TIPS posted strong performance, and we tactically reduced our exposure to around 7.0%. However, our yield curve positioning detracted value because the fund was underweight maturities in the five-year area, which performed well.

Earlier this year, the fund began reducing its small position in securities issued under the TLGP, which provided additional yield to the portfolio. Because we believe the sector is fully valued relative to U.S. Treasuries and most of the outstanding TLGP issues mature within the next two years, only 0.60% of the U.S. Treasury Intermediate Fund is invested in TLGP securities.

We kept the U.S. Treasury Intermediate Fund’s duration, or interest rate sensitivity, broadly neutral relative to the Barclays Capital benchmark. The market is still determining whether Fed buying and risk aversion will drive rates lower or whether they will move higher due to better economic growth.

U.S. Treasury Long-Term Fund
Your fund returned 5.14% for the six-month period ended November 30, 2010. As shown in the Performance Comparison table, the fund outperformed the Lipper peer group average and the Barclays Capital U.S. Treasury Long Index. Fund performance in the last six months reflected $0.22 of dividend income and a $0.39 increase in the NAV, from $11.71 to $12.10.

As with the U.S. Treasury Intermediate Fund, we kept the fund’s duration, or interest rate sensitivity, relatively neutral versus the benchmark. The fund also took advantage of strong performance in the TIPS market, and we tactically reduced our exposure from 6% to 4% as TIPS rallied. The fund’s position in GNMA securities helped performance as investors sought higher yields beyond the relative safety of U.S. Treasuries. We maintained our exposure to GNMA securities at about 5% of the fund during the period. Our positioning along the yield curve also helped performance. We were underweight in longer-duration positions, which helped as the yield curve steepened and the longest-maturity bonds underperformed due to rising inflation expectations and lower investor demand relative to shorter-dated Treasuries that are less sensitive to interest rate fluctuations.

OUTLOOK

The U.S. economy continues to rebound from a deep recession, though the pace of the recovery is slower than investors or policymakers predicted. Many economic indicators—from manufacturing to private sector hiring—have improved considerably in the past six months. Consumer spending has strengthened, and wages have begun to rise. This suggests that the recovery is gaining traction, particularly since government stimulus spending has faded and growth appears to be a result of improved demand for goods and services. However, unemployment remains stubbornly high, the housing market has not fully recovered, and the European debt crisis continues to impede progress.

The Fed’s additional quantitative easing measures should have a positive effect on financial conditions by tightening credit spreads and keeping yields on longer-term bonds contained. We expect longer-term Treasury note and bond yields to remain range-bound in the near term, with rates anchored at the front end of the yield curve for the foreseeable future as inflation remains subdued. This will give the Fed time to ensure that the economic recovery is sound. Longer term, we anticipate higher yields and a flatter yield curve as accommodative policies are removed from the system.

As always, thank you for investing with T. Rowe Price.

Respectfully submitted,

Joseph K. Lynagh
Chairman of the Investment Advisory Committee U.S. Treasury Money Fund

Brian J. Brennan
Chairman of the Investment Advisory Committee
U.S. Treasury Intermediate Fund and U.S. Treasury Long-Term Fund

December 9, 2010

The committee chairmen have day-to-day responsibility for managing the portfolio and work with committee members in developing and executing each fund’s investment program.

RISKS OF INVESTING IN FIXED INCOME SECURITIES

Funds that invest in fixed income securities are subject to price declines due to rising interest rates, with long-term securities generally most sensitive to rate fluctuations. Other risks include credit rating downgrades and defaults on scheduled interest and principal payments, but these are highly unlikely for securities backed by the full faith and credit of the U.S. government. 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 would increase the fund’s sensitivity to rising interest rates and its potential for price declines.

RISKS OF INVESTING IN MONEY MARKET SECURITIES

Since money market funds are managed to maintain a constant $1.00 share price, there should be little risk of principal loss. However, there is no assurance the fund will avoid principal losses if fund holdings default or are downgraded—which are highly unlikely for securities backed by the full faith and credit of the U.S. government—or if interest rates rise sharply in an unusually short period. In addition, the fund’s yield will vary; it is not fixed for a specific period like the yield on a bank certificate of deposit. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in it.

GLOSSARY

Average maturity: The average of the stated maturity dates of a bond or money market portfolio’s securities. The average maturity for a money market fund is measured in days, whereas a bond fund’s average maturity is measured in years. In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes, which means greater price fluctuation.

Barclays Capital U.S. Treasury 4–10 Year Index: An index that includes all Treasuries in the Barclays Capital U.S. Aggregate Index that mature in four to 10 years.

Barclays Capital U.S. Treasury Long Index: An index that includes all Treasuries in the Barclays Capital U.S. Aggregate Index that mature in 10 years or more.

Basis point: One one-hundredth of a percentage point, or 0.01%.

Consumer price index (CPI): A measure of the average price of consumer goods and services purchased by households.

Duration: The average time (expressed in years) needed for an investor to receive the present value of the future cash flows on a fixed income investment. It is used to measure a bond or bond fund’s sensitivity to interest rate changes. For example, a fund with a five-year duration would fall about 5% in price in response to a one-percentage-point increase in interest rates, and vice versa.

Fed funds target rate: An overnight lending rate set by the Federal Reserve and used by banks to meet reserve requirements. Banks also use the fed funds rate as a benchmark for their prime lending rates.

Gross domestic product (GDP): Total market value of all goods and services produced in a country in a given year.

Inflation: A sustained increase in prices throughout the economy.

Lipper average: Consists of all the mutual funds in a particular category as tracked by Lipper Inc.

SEC yield (7-day unsubsidized simple): A method of calculating a money fund’s yield by annualizing the fund’s net investment income for the last seven days of each period divided by the fund’s net asset value at the end of the period. Yield will vary and is not guaranteed.

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.

Treasury inflation protected securities (TIPS): Income-generating bonds that are issued by the federal government and whose interest and principal payments are adjusted for inflation. The inflation adjustment, which is typically applied monthly to the principal of the bond, follows a designated inflation index, such as the consumer price index.

Weighted average life: The dollar-weighted average maturity of a portfolio’s securities without taking into account interest rate reset dates for certain adjustable rate securities. It is a measure that reflects how a fund may react in periods when credit spreads are widening or liquidity conditions are tightening. In general, the longer the fund’s average life, the greater its exposure to interest rate fluctuations. Money funds must maintain a weighted average life of less than 120 days.

Weighted average maturity: 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, such as Treasuries or municipal securities. Yield curves typically slope upward, indicating that longer maturities offer higher yields. When the yield curve is flat, there is little or no difference between the yields offered by shorter- and longer-term securities.

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.

GROWTH OF $10,000

FUND EXPENSE EXAMPLE

As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.

Actual Expenses
The first line of the following table (“Actual”) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information in 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 in 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 small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). 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.