MERRILL
LYNCH
FEDERAL
SECURITIES
TRUST
FUND LOGO
Quarterly Report November 30, 1993
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
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
We may be entering the best of all economic situations, a growing economy
with no signs of inflation. People are working; in fact, the national
unemployment level dropped dramatically in November from 6.8% to 6.4%.
The factory workweek is the longest since World War II. In November,
leading economic indicators and factory orders increased 0.5% and 1.2%,
respectively, the third increase over the last three months. Auto sales
were up 10.4% in November, and sales of existing homes are at a 14-year
high. Third-quarter gross domestic product (GDP) was +2.8%, and fourth-
quarter projections run as high as 5%, although no one expects that level
to be sustained.
<PAGE>
This economic environment is thus far without a hint of inflation. The
consumer price index (CPI) is running at an annualized rate below 3%.
Furthermore, the recent decline in oil prices equates to a 0.5% decline
in the annual rate of inflation as energy prices comprise 7% of the CPI.
Alan Greenspan, Chairman of the Federal Reserve Board, has stated that
inflation may be returning to the levels of pre-Vietnam War buildup. In
any event, his resolve in fighting inflation is well known within the
investment community.
A recovering economy and subdued inflation translate into greater
consumer confidence. The Conference Board reported a huge increase
in consumer confidence for November to the highest level since the
increases following the Presidential election. Personal income is flat
but consumer financial health has improved, largely because of home
refinancings that have significantly reduced mortgage payments. Consumer
spending is up for the seventh straight month and is twice income growth,
resulting in a drop in the savings rate to 3.7%. Consumer activity, the
largest component of GDP, is important for economic health, and the
holiday season is the most important period for consumer spending.
Mortgage-Backed Securities Market
The mortgage market continues to be under tremendous prepayment
pressure. Last month's annualized prepayment figures for Federal
National Mortgage Association (FNMA) 8.50%, 8% and 7.50% coupons were
67%, 54% and 35%, respectively. Prepayments continue to be higher
than anticipated given the current interest rate structure as a
result of the aggressive solicitations by the mortgage bankers
and the evolution of zero point, low document mortgages. Additionally,
FNMA now accepts loan-to-value ratios of up to 95%. The recent backup in
interest rates (for example, the 30-year US Treasury bond is at 6.25%)
has slowed refinance activity somewhat, and although the Mortgage
Bankers' Refinance Index is off the high by 30%, in an absolute
sense it is still very high. The uncertainty of prepayment levels
has caused mortgage spreads to remain very wide, especially given the
relatively low levels of interest rates.
Although the yield curve has flattened significantly, it remains
quite steep. The yield spread between two-year and ten-year US
Treasury notes is 175 basis points (1.75%). Yield curve positioning
remains a very important strategy. For some low-coupon mortgage
securities, the risk has shifted from fast prepayments to slow
prepayments, since slow prepayments cause an extension in average
portfolio maturity in a steep yield curve environment.
<PAGE>
Portfolio Matters
Mortgage securities offer an attractive yield spread over comparable
life US Treasury securities, but the prepayment option to homeowners
results in an uncertain average life. With the steepness in the yield
curve, from a total return standpoint it is more advantageous to invest
in securities with more stable average lives that "roll down" the yield
curve; that is, securities that appreciate in price as their maturities
shorten. Some collateralized mortgage obligation (CMO) structures offer
both the yield advantage of mortgage-backed securities while maintaining
characteristics that allow for rolling down the yield curve. Now that
yield spreads have widened, we plan to shift the portfolio from a heavy
position in US Treasury securities to a heavier position in mortgage
securities, primarily Planned Amortization Class CMOs. These CMOs will
be structured with low-coupon collateral to lessen prepayment risk and
with 15-year mortgages to lessen extension risk. This portfolio shift is
designed to increase the Trust's yield while allowing for capital
appreciation from rolling down the yield curve and from a potential
tightening of yield spreads.
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
December 20, 1993
<TABLE>
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.
<CAPTION>
<PAGE>
Performance Summary--Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1/1/93--11/30/93 9.81 9.97 -- 0.477 + 6.68
Total $0.848 Total $7.414
Cumulative total return as of 11/30/93: +150.96%**
<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.
<CAPTION>
Performance Summary--Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1/1/93--11/30/93 9.81 9.97 -- 0.432 +6.21
Total $1.070
Cumulative total return as of 11/30/93: +12.06%**
<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>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<PAGE>
Year Ended 9/30/93 + 7.23% + 2.94%
Five Years Ended 9/30/93 +10.11 + 9.22
Inception (9/28/84)
through 9/30/93 +10.82 +10.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/93 +6.69% +2.69%
Inception (12/23/91) through 9/30/93 +6.94 +5.32
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
PERFORMANCE DATA (concluded)
<CAPTION>
Recent Performance Results*
12 Month 3 Month
11/30/93 8/31/93 11/30/92 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.97 $10.14 $9.74 +2.36% -1.68%
Class B Shares 9.97 10.14 9.74 +2.36 -1.68
Class A Shares--Total Return +8.09(1) -0.44(2)
Class B Shares--Total Return +7.55(3) -0.56(4)
Class A Shares--Standardized 30-day Yield 3.99%
Class B Shares--Standardized 30-day Yield 3.65%
<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 $0.546 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.126 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.495 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.113 per share ordinary income dividends.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<PAGE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Dates Value
<S> <C> <C> <C> <C>
US Government & Agency Discount Obligations*--26.3%
Federal Home Loan Bank $120,000,000 3.04% 12/23/1993 $ 119,777,067
Federal Home Loan Mortgage Corporation 200,000,000 3.02 12/27/1993 199,563,778
325,000,000 3.03 12/30/1993 324,206,729
Federal National Mortgage Association 175,000,000 3.02 12/14/1993 174,809,153
150,000,000 3.05 12/14/1993 149,834,791
Total US Government & Agency Discount Obligations (Cost--$968,191,518) 968,191,518
<CAPTION>
<S> <C> <C> <C> <C>
US Government & Agency Obligations--22.9%
United States Treasury Notes 30,000,000 7.625 5/31/1996 32,250,000
200,000,000 4.375 8/15/1996 199,500,000
55,000,000 5.625 8/31/1997 56,426,562
85,000,000 6.00 12/31/1997 88,293,750
27,000,000 5.125 2/28/1998 27,101,250
199,000,000 5.125 6/30/1998 199,186,563
145,000,000 5.250 7/31/1998 145,679,688
55,000,000 7.125 10/15/1998 59,640,625
30,000,000 7.50 5/15/2002 33,553,125
Total US Government & Agency Obligations (Cost--$831,619,197) 841,631,563
<CAPTION>
US Government Agency Mortgage-Backed Obligations**--75.1%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 66,278 9.00 10/01/2019 69,840
Participation Certificates 5,572,066 9.00(1) 8/15/2022 780,089
403,338 10.00 7/1/2019--3/01/2021 440,521
42,887,289 10.50 1/01/2010--9/01/2020 47,403,857
11,786,409 11.00 8/01/2010--10/01/2020 13,167,629
10,856,160 11.50 10/01/1998--6/01/2020 12,196,217
3,681,637 12.00 7/01/1999--6/01/2020 4,163,701
8,610,051 12.50 10/01/1999--6/01/2019 9,799,314
10,461,957 13.00 8/01/1999--2/01/2016 11,956,055
Federal Home Loan Mortgage Corporation
Participation Certificates--Gold Program 147,061,849 7.00 2/01/2005--6/01/2023 149,513,959
27,189,223 7.50 1/01/2023--2/01/2023 27,936,927
112,064,514 8.00 10/01/2017--2/01/2023 116,582,115
6,344,676 8.50 7/01/2008--12/01/2021 6,644,065
11,393,565 9.00 6/01/2018--6/01/2022 12,070,057
14,583,826 10.50 9/01/2000--12/01/2020 16,206,276
<PAGE>
Federal Home Loan Mortgage
Corporation REMICs***
93-1468-HA 42,824,000 5.00 2/15/2021 38,220,420
93-1615-E 69,956,000 5.30 8/15/2006 68,469,435
93-1635-E 40,030,243 5.45 1/15/2008 38,979,449
93-1604-E 105,716,536 5.50 3/15/2007 103,437,023
93-1624-EA 86,824,000 5.50 1/15/2007 84,789,062
93-1625-E 40,720,000 5.60 3/15/2007 40,236,450
92-1375-E 40,000,000 6.25 3/15/2004 40,387,500
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity
Issue Amount Rate Dates Value
US Government Agency Mortgage-Backed Obligations** (concluded)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage 93-1501-H $ 25,702,000 6.50% 11/15/2020 $ 25,131,737
Corporation REMICs*** 91-1072-G 11,905,800 7.00 5/15/2006 12,062,064
(concluded) 93-1518-C 65,009,200 7.00 3/15/2019 65,557,715
92-1324-C 25,000,000 7.00 1/15/2020 25,609,375
91-1140-K 20,000,000 7.50 9/15/2020 20,465,625
91-1100-K 25,000,000 8.50 4/15/2005 26,000,000
90-190-F 10,600,000 9.20 10/15/2021 10,851,750
Federal National Mortgage 40,000,000 6.26(2)(3) 11/25/2023 34,425,000
Association Mortgage-Backed 327,340,037 6.50 3/01/2008--11/01/2008 329,590,500
Securities 151,457,332 7.00 6/01/2013--11/01/2023 152,877,244
130,913,792 7.50 1/01/2008--8/01/2023 134,473,804
152,286,163 8.00 1/01/2002--1/01/2022 158,658,016
45,036,641 8.50(1) 9/01/2004--12/01/2022 47,229,597
40,000,000 8.50 11/25/2023 7,400,000
40,045 10.50 9/01/2000 43,323
9,804,453 11.00 2/01/2011--12/01/2020 11,039,201
143,724 11.50 1/01/2015--6/01/2015 162,633
5,015,238 13.00 8/01/2010--6/01/2015 5,798,869
Federal National Mortgage 93-214-EA 94,726,978 5.30 3/25/2007 91,589,147
Association REMICs*** 93-233-E 72,855,000 5.30 10/15/2006 71,284,064
93-214-E 125,000,000 5.50 3/25/2007 121,992,188
93-221-B 95,880,000 5.50 11/25/2006 92,878,956
93-229-PE 33,909,000 5.75 12/25/2007 32,695,694
91-47-H 19,023,000 7.50 5/25/2006 19,653,137
Federal National Mortgage 93-123-S 15,529,411 15.97 7/25/2000 16,781,470
Association REMICs***--
Adjustable Rate+
<PAGE>
Government National Mortgage 24,344,411 6.50 5/15/2008--7/15/2008 24,648,717
Association Mortgage-Backed 64,000,020 7.00 4/15/2023 64,740,020
Securities 25,564,986 7.50 1/15/2007--10/15/2023 26,363,892
108,473,100 8.00 11/15/2006--5/15/2023 113,591,675
56,553,940 8.50 11/15/2004--2/15/20235 9,664,406
39,873,955 9.00 4/15/2009--8/15/2022 42,403,459
22,657,927 9.25 10/15/2023 23,613,808
242,596 9.50 10/15/2017 260,866
768,188 10.00 2/15/2016--12/15/2020 842,846
1,527,837 10.50 10/15/2014--4/15/2021 1,711,178
38,431,073 11.00 11/15/2009--2/15/2021 43,427,113
71,837 11.50 3/15/2013--4/15/2015 82,613
Total US Government Agency Mortgage-Backed Obligations (Cost--$2,763,502,907) 2,759,051,663
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face
Amount Issue Value
Repurchase Agreements****--1.1%
<S> <S> <C>
$ 42,000,000 Nikko Securities Co., purchased on 11/30/1993 to yield 3.25% to 12/01/1993 $ 42,000,000
Total Repurchase Agreements (Cost--$42,000,000) 42,000,000
Total Investments (Cost--$4,605,313,622)--125.4% 4,610,874,744
Liabilities in Excess of Other Assets--(25.4%) (934,952,462)
--------------
Net Assets--100.0% $3,675,922,282
==============
Net Asset Class A--Based on net assets of $1,684,106,595 and 168,938,997
Value: shares of beneficial interest outstanding $ 9.97
==============
Class B--Based on net assets of $1,991,815,687 and 199,798,442
shares of beneficial interest outstanding $ 9.97
==============
<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.
(2)Represents the principal only portion of a mortgage-backed obligation.
(3)Represents the approximate yield to maturity.
++Coupon rates reset periodically. The coupon rates shown are the rates
in effect as of November 30, 1993.
</TABLE>
OFFICERS AND TRUSTEES
Arthur Zeikel, President and 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
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
