MERRILL
LYNCH
FEDERAL
SECURITIES
TRUST
FUND LOGO
Quarterly Report May 31, 1994
This report is not authorized for use as an offer of sale
or a solicitation of an offer to buy shares of the Trust
unless accompanied or preceded by the Trust'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.
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
Custodian
The Bank of New York
110 Washington Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL
32246-6484
(800) 637-3863
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy is continuing its expansion, although
at a more moderate pace. Gross domestic product
(GDP) was reported at 3.0% in the February quarter,
down sharply from the 7.0% level reported in the final
quarter of 1993. Nevertheless, the Federal Reserve
Board, sensing the resulting effects of the stimulus
provided by an accommodative monetary policy,
shifted its stance to a neutral directive. In doing so,
the central bank moved interest rates higher by
tightening the Federal Funds rate 25 basis points
(0.25%) on February 4, 1994. Since then, the Federal
Reserve Board has acted on three separate occasions,
raising the Federal Funds rate a total of 100 basis
points to 4.25% and the discount rate 50 basis points
to 3.50%. In affirming its resolve to fight inflation, the
Federal Reserve Board has increased the Federal
Funds rate faster than it has during the eight previous
cycles of tightening dating back to the mid 1950s.
Recent economic data supports the trend of
moderating growth, as both consumer and housing
sectors have decelerated sharply from 1993 levels.
April reports indicate consumer spending, personal
income, new home sales and factory orders all posted
declines, while the Index of Leading Economic
Indicators remained unchanged. Higher interest rates
along with the effects of severe winter weather have
caused housing starts and new home sales to fall far
below the peak levels reached during the latter half
of 1993. In addition, higher mortgage rates have
virtually ended mortgage refinancing activity, a
major source of consumer spending power in 1993. As
a result, real consumer spending declined 0.4% in
April. The industrial sector continues to advance,
but at a more sustainable pace. In April durable goods
orders generated a weaker-than-expected 0.1% gain.
Overall, factory orders slipped 0.1%, with factory
shipments down 0.3% and inventories rising 0.2%.
<PAGE>
On the positive side, inflation remains subdued.
Both the Producer Price Index (PPI) and Consumer
Price Index (CPI) continue to indicate that minimal
inflationary forces exist in the economy. In May the
PPI was reported to be down 0.1% and down 0.4%
over the prior year. More important, prices at all
three stages of production indicate no underlying
inflationary pressures anywhere, as prices of crude,
intermediate and finished goods are all flat to down.
Meanwhile, the CPI, reported at 0.2% in May and 2.3%
for the past year, remains well below expansionary
historical averages and poses no threat to overall
economic health. In addition, wage pressures
continue to remain under control as unit labor costs
rose less than 1% over the prior year.
The months ahead bode well for the fixed-income
markets, in our opinion. As economic growth moder-
ates and the economy continues to grow at its
noninflationary potential, we expect inflationary pres-
sures to remain nonexistent. Although we expected
GDP to be higher during the May quarter as weather-
depressed sectors corrected for a weak performance
in the February quarter, the momentum is unlikely
to be carried over to the latter half of 1994. Higher
interest rates will curb private domestic demand and
limit growth in the second half of 1994.
Investment Environment
With the recent backup in interest rates, much of the
uncertainty regarding mortgage prepayments has
been removed. The Mortgage Bankers Association
Refinance Index has plummeted from its high of
1,727 in September 1993 to its current low of 134.
With so many mortgages being refinanced at lower
interest rates during 1992 and 1993, and with current
30-year mortgage rates above 8.50%, it is unlikely
that there will be a prepayment shock even if interest
rates decline 100 basis points--150 basis points.
<PAGE>
The concern surrounding the reduction of prepay-
ments led to investor concerns regarding extension
risk as slower prepayments mean longer average
lives. The Trust was able to limit the effects of this
phenomenon by shifting a large part of the portfolio
from 30-year mortgages to 15-year mortgages. To
illustrate, 30-year 8% Federal National Mortgage
Association securities extended in average life from
2.6 years to 4.9 years. In contrast, 15-year 6.50%
Federal National Mortgage Association securities
only extended from 4.4 years to 4.8 years. In a rising
interest rate environment, securities with less
extension in average life tend to perform better.
Another way to reduce the effects of changing pre-
payment speed is to own US Treasury securities. During
1993, the Trust increased the Treasury portion of the
portfolio to as high as 37%. Well-structured collater-
alized mortgage obligations (those that have known
cash flows within a wide range of prepayment speeds)
were also used to lessen prepayment exposure.
With interest rates appearing to be stabilizing and
prepayment concerns having abated, the Trust has
increased its mortgage positions by reducing its
Treasury holdings. This will not only add yield to
the portfolio, but will allow for enhanced price per-
formance should yield spreads tighten. We anticipate
that the reduced uncertainty of prepayments will
make mortgage-backed securities (MBS) more
attractive. Therefore, MBS prices should outperform
similar average life Treasury securities.
We thank you for your investment in Merrill Lynch
Federal Securities Trust, and we look forward to
reviewing our outlook and strategy with you again in
our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
June 22, 1994
<PAGE>
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Joe Grills, Trustee
Walter Mintz, Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, Trustee
Harry Woolf, Trustee
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Teresa L. Giacino, Vice President
Jeffrey B. Hewson, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of Class A
and Class B Shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/94 +1.21% -2.84%
Five Years Ended 3/31/94 +9.26 +8.38
Inception (9/28/84)
through 3/31/94 +9.90 +9.43
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/94 +0.80% -3.04%
Inception (12/23/91)
through 3/31/94 +4.04 +3.23
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
9/28/84--12/31/84 $9.38 $9.64 $0.022 $0.187 + 4.12%
1985 9.64 9.96 0.344 1.051 +19.93
1986 9.96 9.87 0.440 0.862 +13.36
1987 9.87 9.23 0.042 0.834 + 2.35
1988 9.23 9.07 -- 0.849 + 7.67
1989 9.07 9.39 -- 0.863 +13.64
1990 9.39 9.48 -- 0.835 +10.43
1991 9.48 9.94 -- 0.787 +13.75
1992 9.94 9.81 -- 0.669 + 5.64
1993 9.81 9.98 -- 0.532 + 7.27
1/1/94--5/31/94 9.98 9.40 -- 0.208 - 3.66
------ ------
Total $0.848 Total $7.677
Cumulative total return as of 5/31/94: +143.10%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do
not include sales charge; results would be lower if sales charge
was included.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/23/91--12/31/91 $9.92 $9.94 -- $0.019 + 0.39%
1992 9.94 9.81 -- 0.619 + 5.10
1993 9.81 9.98 -- 0.481 + 6.73
1/1/94--5/31/94 9.98 9.40 -- 0.189 - 3.85
------
Total $1.308
Cumulative total return as of 5/31/94: +8.28%**
<FN>
* Figures may include short-term capital gains distributions.
** Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date, and do not reflect deduction of any
sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
5/31/94 2/28/94 5/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.40 $9.89 $9.97 -5.72 -4.95%
Class B Shares 9.40 9.89 9.97 -5.72 -4.95
Class A Shares--Total Return -0.63(1) -3.56(2)
Class B Shares--Total Return -1.13(3) -3.68(4)
Class A Shares--Standardized 30-day Yield 5.10%
Class B Shares--Standardized 30-day Yield 4.83%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1)Percent change includes reinvestment of $0.520 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.138 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.470 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.126 per share ordinary income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates
US Government & Agency Discount Obligations*--5.5%
<S> <C> <C> <C> <C>
Federal Farm Credit Bank $ 50,000,000 4.12% 6/13/1994 $ 49,931,333
Federal Home Loan Bank 100,000,000 4.14 6/20/1994 99,781,500
Federal Home Loan Mortgage Corporation 20,000,000 4.13 6/13/1994 19,972,467
Total US Government & Agency Discount Obligations (Cost--$169,685,300) 169,685,300
<CAPTION>
US Government & Agency Obligations--11.7%
<S> <C> <C> <C> <C>
United States Treasury Notes 30,000,000 5.625 1/31/1998 29,100,000
100,000,000 5.25 7/31/1998 94,953,000
250,000,000 5.00 1/31/1999 232,930,000
Total US Government & Agency Obligations (Cost--$378,932,584) 356,983,000
<CAPTION>
US Government Agency Mortgage-Backed Obligations**--84.8%
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 25,422,613 3.613++ 12/01/2023 24,707,602
Participation Certificates 46,511 9.00 10/01/2019 47,907
3,735,094 9.00(1) 8/15/2022 1,069,171
874 10.00 7/01/2019 928
33,348,709 10.50 9/01/2000-9/01/2020 36,308,407
8,893,250 11.00 8/01/2010-10/01/2020 9,815,924
8,108,431 11.50 10/01/1998-6/01/2020 9,000,358
3,094,859 12.00 7/01/1999-6/01/2020 3,482,676
8,225,212 12.50 10/01/1999-7/01/2019 9,428,149
8,835,286 13.00 8/01/1999-2/01/2016 10,215,799
Federal Home Loan Mortgage Corporation 159,803,818 6.00 6/01/2008-5/01/2009 148,467,335
Participation Certificates--Gold Program 109,463,423 6.50 6/01/2008-3/01/2024 102,594,502
116,069,337 7.00 2/01/2005-5/01/2024 111,134,998
25,468,135 7.50 5/01/2024 24,791,447
4,365,082 8.50 4/01/2017-12/01/2021 4,429,161
7,444,288 9.00 6/01/2018-6/01/2022 7,679,230
11,607,551 10.50 10/01/2020-12/01/2020 12,695,759
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage 93-1635-E 40,030,243 5.45 1/15/2008 36,540,106
Corporation REMICs*** 93-1604-E 105,716,536 5.50 3/15/2007 96,829,740
93-1518-C 40,009,200 7.00 3/15/2019 37,633,654
90-190-F 5,465,728 9.20 10/15/2021 5,520,385
Federal Home Loan Mortgage 93-1468-HA 42,824,000 5.00 2/15/2021 34,473,320
Corporation REMICs***-- 92-1375-E 40,000,000 6.25 3/15/2004 38,300,000
Gold Program 93-1501-H 25,702,000 6.50 11/15/2020 23,131,800
91-1072-G 11,905,800 7.00 5/15/2006 11,403,524
92-1324-C 25,000,000 7.00 1/15/2020 24,125,000
91-1140-K 20,000,000 7.50 9/15/2020 19,825,000
91-1100-K 25,000,000 8.50 4/15/2005 25,687,500
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Dates
US Government & Agency Discount Obligations*--5.5%
<S> <C> <C> <C> <C> <C>
Federal National Mortgage $ 197,201,371 6.00% 1/01/2008-3/01/2009 $ 182,841,167
Association Mortgage-Backed 176,425,746 6.50 8/01/2008-5/01/2024 164,070,734
Securities 50,269,726 7.00 12/01/2007-5/01/2024 47,488,805
71,105,813 7.50 1/01/2008 69,107,954
162,578,690 8.00 12/01/2016-5/01/2024 162,140,384
21,409,834 8.50 9/01/2004-12/01/2022 21,751,709
34,045 10.50 9/01/2000 36,268
78,509,157 11.00 2/01/2011-12/01/2020 87,439,574
142,684 11.50 1/01/2015-6/01/2015 159,806
3,944,239 13.00 8/01/2010-6/01/2015 4,516,154
Federal National Mortgage 93-214-EA 94,726,978 5.30 3/25/2007 85,698,313
Association REMICs*** 91-47-H 19,023,000 7.50 5/25/2006 18,529,591
93-123-S 15,529,411 12.208++++ 7/25/2000 13,510,588
<PAGE>
Government National Mortgage 100,547,207 5.50++ 1/20/2024 98,599,105
Association Mortgage-Backed 23,486,673 6.50 5/15/2008-7/15/2008 22,268,184
Securities 23,666,218 7.00 4/15/2022-3/15/2024 22,127,913
323,683,842 7.50 1/15/2007-5/15/2024 312,555,592
165,585,850 8.00 9/15/2005-5/15/2024 164,550,938
47,357,885 8.50 11/15/2004-5/15/2024 48,142,132
112,651,279 9.00 4/15/2009-4/15/2023 116,734,888
22,589,146 9.25 10/15/2023 22,589,146
157,882 9.50 10/15/2017 166,466
492,713 10.00 2/15/2016 527,203
822,247 10.50 10/15/2014-4/15/2021 900,361
48,236,633 11.00 11/15/2009-4/15/2021 54,537,302
32,986 11.50 8/15/2013-4/15/2015 37,810
Total US Government Agency Mortgage-Backed Obligations (Cost--$2,676,972,063) 2,590,367,469
<CAPTION>
Face
Amount Issue
Repurchase Agreements****--4.6%
<C> <S> <C>
$ 40,000,000 Greenwich Capital Corp., purchased on 5/31/1994 to yield 4.30% to 6/01/1994 40,000,000
100,000,000 Nikko Securities Co., purchased on 5/31/1994 to yield 4.30% to 6/01/1994 100,000,000
Total Repurchase Agreements (Cost--$140,000,000) 140,000,000
Total Investments (Cost--$3,365,589,947)--106.6% 3,257,035,769
Liabilities in Excess of Other Assets--(6.6%) (202,254,636)
--------------
Net Assets--100.0% $3,054,781,133
==============
Net Asset Class A--Based on net assets of $1,436,333,610 and 152,774,186 shares of beneficial
interest outstanding $ 9.40
==============
Class B--Based on net assets of $1,618,447,523 and 172,138,452 shares of beneficial
interest outstanding $ 9.40
==============
<PAGE>
<FN>
*US Government & Agency Discount Obligations are traded on a
discount basis and amortized to maturity. The interest rates shown
are the discount rates paid at the time of purchase by the Trust.
**Mortgage-Backed Obligations are subject to principal paydowns as
a result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially
less than the original maturity.
***Real Estate Mortgage Investment Conduits (REMICs).
****Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
(1)Represents the interest only portion of a mortgage-backed obligation.
++Coupon rates reset periodically. The coupon rates shown are
the rates in effect as of May 31, 1994.
++++Inverse floating rate security.
</TABLE>
