MERRILL LYNCH
MUNICIPAL BOND
FUND, INC.
FUND LOGO
Quarterly Report
September 30, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
DEAR SHAREHOLDER
The Municipal Market Environment
During the quarter ended September 30, 1998, long-term fixed-income
bond yields declined significantly. The near absence of any
inflationary pressures in the United States continued to support
historic low interest rates. Additionally, foreign economic factors
have continued to outweigh US domestic fundamentals, as they have
for much of 1998. The economic crisis that began in Asia over a year
ago has spread both to Russia and South America. However, economic
factors in these countries have begun to negatively impact US
growth. For example, employment in the US manufacturing sector
declined in recent months as a result of reduced demand for export
goods. Concern that the modest decline in US economic growth seen
thus far would spread and intensify led the Federal Reserve Board to
lower short-term interest rates in late September and again in
October. This action was taken mainly to offset the drag of foreign
economies on future US economic growth.
Long-term uninsured municipal revenue bond yields, as measured by
the Bond Buyer Revenue Bond Index, declined by more than 25 basis
points (0.25%) to end the September quarter at 5.09%, their lowest
level since the early 1970s. US Treasury bond yields benefited from
a "flight to quality" as foreign investors were drawn to the
relative safe haven of US Government securities. Additionally, the
sharp US equity market correction, which began at the end of August,
triggered an additional flight into US Treasury securities. Long-
term US Treasury bond yields fell over 65 basis points to end the
September quarter at 4.97%. This is the lowest level since the US
Treasury reintroduced 30-year maturity bond auctions in 1977.
During the past 12 months, the tax-exempt bond market has had to
contend with significant new-issue supply pressures. Over the past
year, approximately $280 billion in new long-term municipal bonds
were underwritten, an increase of almost 33% compared to the same
period a year ago. During the most recent six-month period, nearly
$140 billion in new securities were issued, representing an increase
of nearly 25% over the six-month period last year. For the quarter
ended September 30, 1998, approximately $65 billion in long-term
municipal bonds were underwritten, an increase of more than 10%
compared to the quarter ended September 30, 1997.
The continued increase in bond issuance has required lower and lower
tax-exempt bond yields to generate the economic savings necessary
for additional municipal bond financings. Consequently, the pace of
new bond issuance has slowed in recent months. In fact, the trend
may be reversing. During the month of September, only $17.3 billion
in new long-term municipal bonds were issued, a decrease of almost
25% from the more than $22 billion issued in September 1997. In the
coming months, we will monitor this trend closely to determine if
supply pressures exerted thus far in 1998 are abating and fostering
a more balanced supply/demand environment.
The current weaknesses in the global financial system suggest that
over the near term, fixed-income bond yields, including municipal
bond yields, are unlikely to rise by any appreciable amount. With
recent supply pressures, and since municipal securities do not have
the same safe-haven status enjoyed by US Treasury securities,
municipal bond yield spreads widened relative to US Treasury bond
yields. At September 30, 1998, long-term tax-exempt bond yield
spreads were attractive relative to US Treasury securities of
comparable maturities (over 100%), well in excess of their historic
range of 85%--88%. Tax-exempt bond yield ratios have rarely
exceeded 90% in the 1980s and 1990s. Historically, yield spreads
have been wider than these levels only when there have been
potential changes in Federal tax codes that would have adversely
affected the tax-favored status of municipal bonds.
Currently, municipal bond investors find themselves in a unique
investment environment. At present, almost the entire municipal bond
universe, across nearly all maturity and credit sectors, can be
purchased at yields greater than their taxable counterparts.
However, the current opportunity could quickly disappear if tax-
exempt bond supply pressures diminish or if US Treasury securities
become less desirable as safe-haven investments. Under these
conditions, municipal bond ratios should quickly revert to more
normal historic percentages, certainly well below their presently
attractive levels.
Portfolio Strategy
Insured Portfolio and
National Portfolio
During the quarter ended September 30, 1998, the Insured and
National Portfolios benefited from the extraordinary drop in
interest rates because of their relatively fully invested position
and aggressive market stance. Throughout the September quarter, the
municipal marketplace witnessed a rally that drove yields on long-
term tax-exempt securities through 5%, a barrier we would normally
have considered to provide greater resistance. Although impressive,
this rally was overshadowed by the larger move in the drop in US
Treasury interest rates. The outperformance of taxable issues over
tax-exempt issues left municipal bonds relatively inexpensive, in
some cases offering yields over 100% of their taxable counterparts.
Because of the attractive nature of municipal bonds with high-
quality ratings, we do not anticipate that any of the recent market
gains are likely to reverse, even if the US Treasury market should
experience a mild correction. Therefore, we will maintain an
aggressive investment strategy by using any market pullbacks to
improve each Portfolio's structure in an effort to continue to
enhance total returns in a declining interest rate environment.
Looking ahead, the Portfolios' call protection will continue to be
managed to ensure that current income is not dramatically impacted
as older dated, high-coupon holdings are redeemed in the current low
interest rate environment. We will closely monitor changes in the
domestic and global economic environment for signs of interest rates
moving higher. However, our strategy currently remains to stay
committed to the long-term municipal bond market, emphasizing
quality credits in any new purchases.
Limited Maturity Portfolio
During the quarter ended September 30, 1998, the Limited Maturity
Portfolio continued to be aggressively positioned because of our
belief that the global financial crisis and economic downturn would
cause short-term interest rates to fall. We kept the Portfolio's
cash reserves close to zero during the September quarter, and also
maintained the average portfolio maturity close to or at its maximum
of two years for most of the quarter. This approach enhanced the
performance of the Portfolio as short-term interest rates fell
dramatically and the Federal Reserve Board cut interest rates in
late September for the first time since January 1996.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Municipal Bond
Fund, Inc., and we look forward to serving your investment needs in
the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Kenneth A. Jacob)
Kenneth A. Jacob
Vice President and Portfolio Manager
(Walter C. O'Connor)
Walter C. O'Connor
Vice President and Portfolio Manager
(Peter J. Hayes)
Peter J. Hayes
Vice President and Portfolio Manager
November 3, 1998
Merrill Lynch Municipal Bond Fund, Inc., September 30, 1998
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
incurs a maximum initial sales charge (front-end load) of 1% and
bears no ongoing distribution or account maintenance fees.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year for Insured and National
Portfolios. Limited Maturity Portfolio is subject to a maximum
contingent deferred sales charge of 1% if redeemed within one year
of purchase. In addition, Insured and National Portfolios are
subject to a distribution fee of 0.50% and an account maintenance
fee of 0.25%. Limited Maturity Portfolio is subject to a
distribution fee of 0.20% and an account maintenance fee of 0.15%.
All three classes of shares automatically convert to Class D Shares
after approximately 10 years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25% for Insured and National
Portfolios. Limited Maturity Portfolio is subject to a distribution
fee of 0.20% and an account maintenance fee of 0.15%. In addition,
Class C Shares are subject to a 1% contingent deferred sales charge
if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee) for
Insured and National Portfolios. Limited Maturity Portfolio incurs a
maximum initial sales charge of 1% and an account maintenance fee of
0.10% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net
asset value on the payable date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Merrill Lynch Municipal Bond Fund, Inc., September 30, 1998
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
Ten Years/
Since Standardized
12 Month 3 Month Inception 30-Day Yield
Total Return Total Return Total Return As of 9/30/98
<S> <C> <C> <C> <C>
ML Municipal Bond Fund, Inc. Insured Portfolio Class A Shares** +8.45% +3.37% +115.23% 4.22%
ML Municipal Bond Fund, Inc. Insured Portfolio Class B Shares** +7.64 +3.29 + 97.24 3.65
ML Municipal Bond Fund, Inc. Insured Portfolio Class C Shares** +7.58 +3.28 + 34.56 3.60
ML Municipal Bond Fund, Inc. Insured Portfolio Class D Shares** +8.18 +3.43 + 37.55 3.98
ML Municipal Bond Fund, Inc. National Portfolio Class A Shares*** +8.54 +3.16 +118.97 4.34
ML Municipal Bond Fund, Inc. National Portfolio Class B Shares*** +7.73 +3.06 +100.82 3.76
ML Municipal Bond Fund, Inc. National Portfolio Class C Shares*** +7.77 +3.04 + 36.89 3.71
ML Municipal Bond Fund, Inc. National Portfolio Class D Shares*** +8.27 +3.19 + 39.91 4.10
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio Class A Shares**** +4.56 +1.47 + 63.32 3.35
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio Class B Shares**** +4.30 +1.38 + 24.33 3.02
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio Class C Shares**** +4.07 +1.27 + 16.74 3.01
ML Municipal Bond Fund, Inc. Limited Maturity Portfolio Class D Shares**** +4.46 +1.45 + 18.48 3.25
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date.
**The Fund's ten-year/inception periods are: Class A Shares, for the
ten years ended 9/30/98; Class B Shares, from 10/21/88 to 9/30/98;
and Class C & Class D Shares, from 10/21/94 to 9/30/98.
***The Fund's ten-year/inception periods are: Class A Shares, for
the ten years ended 9/30/98; Class B Shares, from 10/21/88 to
9/30/98; and Class C & Class D Shares, from 10/21/94 to 9/30/98.
****The Fund's ten-year/inception periods are: Class A Shares, for
the ten years ended 9/30/98; Class B Shares, from 11/2/92 to
9/30/98; and Class C & Class D Shares, from 10/21/94 to 9/30/98.
</TABLE>
Average Annual
Total Returns
Insured Portfolio
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +8.45% +4.11%
Five Years Ended 9/30/98 +5.62 +4.76
Ten Years Ended 9/30/98 +7.97 +7.53
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +7.64% +3.64%
Five Years Ended 9/30/98 +4.83 +4.83
Inception (10/21/88) through 9/30/98 +7.07 +7.07
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Class C Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +7.58% +6.58%
Inception (10/21/94) through 9/30/98 +7.82 +7.82
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +8.18% +3.85%
Inception (10/21/94) through 9/30/98 +8.42 +7.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
National Portfolio
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +8.54% +4.20%
Five Years Ended 9/30/98 +6.18 +5.32
Ten Years Ended 9/30/98 +8.15 +7.71
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +7.73% +3.73%
Five Years Ended 9/30/98 +5.40 +5.40
Inception (10/21/88) through 9/30/98 +7.26 +7.26
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payments of applicable contingent deferred sales charge.
% Return % Return
Class C Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +7.77% +6.77%
Inception (10/21/94) through 9/30/98 +8.29 +8.29
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +8.27% +3.94%
Inception (10/21/94) through 9/30/98 +8.89 +7.77
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Limited Maturity Portfolio
% Return Without % Return With
Class A Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +4.56% +3.52%
Five Years Ended 9/30/98 +3.97 +3.77
Ten Years Ended 9/30/98 +5.03 +4.92
[FN]
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
% Return % Return
Class B Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +4.30% +3.30%
Five Years Ended 9/30/98 +3.61 +3.61
Inception (11/2/92) through 9/30/98 +3.75 +3.75
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Class C Shares* Without CDSC With CDSC**
Year Ended 9/30/98 +4.07% +3.07%
Inception (10/21/94) through 9/30/98 +4.00 +4.00
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Class D Shares* Sales Charge Sales Charge**
Year Ended 9/30/98 +4.46% +3.42%
Inception (10/21/94) through 9/30/98 +4.40 +4.13
[FN]
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
Merrill Lynch Municipal Bond Fund, Inc., September 30, 1998
PORTFOLIO COMPOSITION
For the Quarter Ended September 30, 1998
Insured
Portfolio
Top Ten States*
New York 16.91%
Texas 10.89
Illinois 10.80
Pennsylvania 6.43
Colorado 5.57
New Jersey 4.95
Nevada 3.98
Florida 3.85
Massachusetts 3.76
Wisconsin 3.33
-------
Total Top Ten 70.47
Total Others 29.53
-------
Total Portfolio 100.00%
=======
Net assets as of September 30, 1998 were $1,957,706,481.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 97%
AA/Aa 1%
Other++ 2%
[FN]
*Based on total market value of the Portfolio as of September 30,
1998.
++Temporary investments in short-term municipal securities.
National
Portfolio
Top Ten States*
New York 18.23%
Texas 9.82
Florida 9.35
Colorado 6.91
Pennsylvania 6.37
Massachusetts 5.52
Wisconsin 3.85
Illinois 3.73
Louisiana 3.48
Minnesota 3.25
-------
Total Top Ten 70.51
Total Others 29.49
-------
Total Portfolio 100.00%
=======
Net assets as of September 30, 1998 were $1,510,070,173.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 52%
AA/Aa 20%
A/A 10%
BBB/Baa 9%
BB/Ba 1%
CCC/Caa 1%
Other++ 3%
NR+++ 4%
[FN]
*Based on total market value of the Portfolio as of September 30,
1998.
++Temporary investments in short-term municipal securities.
+++Not Rated.
Top Ten States*
New York 18.29%
Ohio 9.50
Texas 8.33
Washington 7.28
Illinois 4.59
Wisconsin 4.28
Michigan 3.86
Pennsylvania 3.14
Connecticut 3.13
Tennessee 2.94
-------
Total Top Ten 65.34
Total Others 34.66
-------
Total Portfolio 100.00%
=======
Net assets as of September 30, 1998 were $404,272,396.
Limited Maturity
Portfolio
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
MIG1+/SP-1 5%
AAA/Aaa 45%
AA/Aa 32%
A/A 8%
BBB/Baa 6%
Other++ 1%
NR+++ 3%
[FN]
*Based on total market value of the Portfolio as of September 30,
1998.
++Highest short-term rating by Moody's Investors Service, Inc.
++++Temporary investments in short-term municipal securities.
+++Not Rated.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Peter J. Hayes, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
