MERRILL LYNCH
FEDERAL
SECURITIES
TRUST
FUND LOGO
Quarterly Report
November 30, 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
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The major themes we outlined in our August report
to shareholders continued to persist during the
Trust's quarter ended November 30, 1994. The US
economy has expanded for 14 consecutive quarters,
with little evidence of the eroding effects of inflation.
Although there are some potential problems that
threaten the status quo in the long term, we do not
anticipate a meaningful reversal of these economic
trends over the next quarter. Gross domestic product
expanded at a revised 3.9% annual rate for the quarter
ended September 30, 1994 and 4.4% for the past
12 months. This is far in excess of the 2.5% rate de-
fined by the Federal Reserve Board as noninflationary.
Consumer activity is robust, and confidence in the
economy as measured by the Conference Board Index
climbed ten points in November to its highest level
since 1990. The surge in confidence is warranted
given the fact that unemployment has dipped to 5.6%
as nonfarm payrolls have expanded by more than
3 million positions in 1994. Confidence is also buoyed
by increases in personal income, which also had the
impact of increasing the savings rate. In addition,
confidence measures may be supported by optimism
that typically surfaces when election results dictate
major changes in policy. Consumers have been highly
active in both the housing and retail sectors. New
home sales are currently at their highest level of the
year, and increases in disposable income have trans-
lated to growth in sales at the retail level.
Growth in the industrial sectors is contained in
comparison with the consumer sectors. While indus-
trial production and capacity utilization have nudged
up this year, inventory buildup is occurring and
factory and durable goods orders are beginning to
level off. Additionally, confidence as measured by the
National Association of Purchasing Managers is cur-
rently at a ten-year high, although the business sector
displays less enthusiasm compared with consumers.
However, concurrent with the perceived overheating
economy, there has been a period of remarkable price
stability. Prices as measured by the Producer Price
Index have declined since August 1994 and have risen
less than 1% this year. Consumer prices have risen
by approximately 2%.
<PAGE>
However, there are several factors which we believe
may impede the ability of the economy to sustain
expansion at its current pace for the longer term. Of
major concern is the increase in the amount of con-
sumer credit, which has ballooned to $10 billion per
month for the past seven months. Sooner or later
these debts must be satisfied, which will require an
increase in disposable income. However, there likely
will be a squeeze on consumer spending as higher
interest rates on credit cards and resets on adjustable
rate mortgages take effect.
Investment Environment
Fiscal policy factors traditionally have weighed
heavily in the decisions of investors as the cumula-
tive Federal budget deficit continues to expand.
Investors do not anticipate improvement on this front
regardless of the change in Congressional leadership.
For these reasons, although we anticipate buoyant
economic activity for the upcoming holiday season,
we are less optimistic over the long term.
In spite of the very low inflation environment, the
old adage "what's good for the economy is bad for the
bond market" has proven true again this quarter as
interest rates continued their upward climb, which
commenced in October 1993. Fixed-income investors
have exited the market as they anticipated the
emergence of increasing inflation, which would be
combated by the Federal Reserve Board with higher
interest rates. The actions by the Federal Reserve
Board and the bond market selloff have created an
environment of extraordinary value in the fixed-
income market from a fundamental perspective. Real
rates of return of 5% are currently available with
Treasury securities of two years and longer. This
allows for significantly higher inflation while main-
taining attractive real rates of return. While technical
factors could continue to put upward pressure on
interest rates, on a fundamental basis the bond
market is very attractive, and we view higher interest
rates as opportunities to expand longer-term fixed-
income investments.
<PAGE>
As has been the case numerous times this year, on
November 14 the Federal Reserve Board increased
short-term interest rates in an attempt to slow the
rate of economic expansion. As a result, prices of most
of the Fund's underlying investments declined as
interest rates rose on all maturities during the
quarter. The yield curve flattened dramatically as
the two-year US Treasury note increased 125 basis
points (1.25%) to close the quarter at 7.40% and the
30-year Treasury bond ended the quarter at 8%, a rise
of 55 basis points for the quarter. In terms of price,
the shorter maturity on the two-year issue limited
its price decline to 2.25 points while the value of the
30-year bond declined 6.75 points. The yield spread
of 60 basis points is the lowest since 1990 and was as
wide as 360 basis points in 1992.
The mortgage backed securities (MBS) market out-
performed the Treasury market significantly during
the November quarter. For example, 7.50% Government
National Mortgage Association securities had a total
return of -2.53% for the quarter and 7.50% Federal
National Mortgage Association (FNMA) securities
returned -2.32%. The ten-year Treasury note trailed
both with a total return of -3.18%. While MBS usually
track ten-year notes, MBS actually have the price
sensitivity of shorter average life securities. This is a
result of the "front loaded" cash flows inherent in
MBS which receive payments of both principal and
interest on a monthly basis, while Treasury securities
pay interest semi-annually and principal at maturity.
The five-year area also favored investors, as demon-
strated in 15-year MBS, which have an average life of
five years. The five-year Treasury note returned
- -2.17% for the November quarter, and the 15-year
FNMA 7.50% returned -1.77%.
<PAGE>
The backup in interest rates caused mortgage prepay-
ments to plummet. Slow prepayments have the effect
of extending average lives for the related MBS as
well as reducing yield on deep discount MBS. We
therefore reduced the Trust's exposure to 30-year
7%--7.5% MBS from 22% of net assets to 17% and closed
out the 4.5% position dedicated to 15-year 6.5% MBS.
Proceeds from these sales were invested in 30-year
8%--8.5% MBS, which offer higher yields than deep
discounts and have a higher level of yield protection
in a slower prepayment environment. We also estab-
lished a 4.5% position in 7% balloon MBS with five-
year maturities. These securities provide a yield
advantage over comparable average life Treasuries
and have definite extension limitations.
The fundamental value in the marketplace enabled
us to decrease the Trust's cash liquidity position
to 3% of net assets from 9% at the beginning of the
quarter. Thirty-year MBS currently account for 60%
of the Trust's net assets, while collateralized mortgage
obligations account for an additional 14%. Finally,
23% of the Trust is positioned in Treasury securities,
concentrating on five-year and seven-year maturities.
In Conclusion
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 23, 1994
<PAGE>
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been 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 fees. Class A
Shares are available only to eligible investors. If you
were a Class A shareholder prior to October 21, 1994,
your Class A Shares were redesignated to Class D
Shares on October 21, 1994.
* 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. In addition, Class B Shares are
subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically
convert to Class D Shares after 10 years.
* Class C Shares are subject to a distribution fee of
0.55% and an account maintenance fee of 0.25%. 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).
Performance data for the Fund's Class B Shares and
Class D Shares are presented in the "Performance
Summary" table on page 4 and the "Average Annual
Total Return" table below. Data for all of the Fund's
shares, including Class A Shares and Class C Shares, are
presented in the "Recent Performance Results" table.
<PAGE>
The "Recent Performance Results" table on page 5
shows investment results before the deduction of any
sales charges for Class B and Class D Shares for the
12-month and 3-month periods ended November 30,
1994 and for Class A and Class C Shares for the
period since inception through November 30, 1994. All
data in this table assume imposition of the actual
total expenses incurred by each class of shares during
the relevant period.
None of the past results shown should 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.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/94 -3.70% -7.35%
Inception (12/23/91)
through 9/30/94 +2.97 +2.34
[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 Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/94 -3.20% -7.07%
Five Years Ended 9/30/94 +7.36 +6.48
Ten Years Ended 9/30/94 +9.33 +8.88
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares
converted to Class D Shares.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<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--11/30/94 9.98 9.06 -- 0.453 - 4.54
------
Total $1.572
Cumulative total return as of 11/30/94: +7.49%**
<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>
Performance Summary--Class D 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--11/30/94 9.98 9.06 -- 0.496 - 4.11
------ ------
Total $0.848 Total $7.965
Cumulative total return as of 11/30/94: +141.96%**
<PAGE>
<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.
***As a result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A Shares of the Fund outstanding prior to October 21, 1994 have been
redesignated to Class D Shares.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
11/30/94 8/31/94++ 11/30/93 % Change % Change++
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.06 $9.16 -- -- -1.09%
Class B Shares* 9.06 9.41 $9.97 -9.13% -3.72
Class C Shares* 9.06 9.16 -- -- -1.09
Class D Shares* 9.06 9.41 9.97 -9.13 -3.72
Class A Shares--Total Return* -- -0.31(1)
Class B Shares--Total Return* -4.07(2) -2.11(3)
Class C Shares--Total Return* -- -0.37(4)
Class D Shares--Total Return* -3.59(5) -1.99(6)
Class A Shares--Standardized 30-day Yield 7.03%
Class B Shares--Standardized 30-day Yield 6.54%
Class C Shares--Standardized 30-day Yield 6.57%
Class D Shares--Standardized 30-day Yield 6.78%
<FN>
*Investment results shown do not reflect sales charges; results would be lower if a
sales charge was included.
++Investment results shown for Class A and Class C Shares are since inception (10/21/94).
(1)Percent change includes reinvestment of $0.051 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.502 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.141 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.046 per share ordinary income dividends.
(5)Percent change includes reinvestment of $0.551 per share ordinary income dividends.
(6)Percent change includes reinvestment of $0.153 per share ordinary income dividends.
<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
Custodian
The Bank of New York
90 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
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
Face Interest Maturity
Issue Amount Rate Date(s) Value
US Government Obligations--22.81%
<S> <C> <C> <C> <C>
United States Treasury Notes $ 20,000,000 6.50 % 8/15/1997 $ 19,475,000
30,000,000 5.625 1/31/1998 28,270,200
225,000,000 8.25 7/15/1998 228,514,500
200,000,000 8.875 2/15/1999 207,874,000
15,000,000 7.125 9/30/1999 14,587,500
75,000,000 7.50 11/15/2001 73,675,500
10,000,000 7.25 8/15/2004 9,542,200
Total US Government Obligations (Cost--$598,586,530) 581,938,900
<PAGE>
US Government Agency Mortgage-Backed Obligations*--74.91%
Federal Home Loan Mortgage Corporation
Participation Certificates 3,276,005 9.00(1) 4/15/2022 1,049,337
760 10.00 7/01/2019 795
28,135,431 10.50 9/01/2000 29,867,448
7,279,408 11.00 8/01/2010-9/01/2020 7,843,563
6,379,383 11.50 10/01/1998-6/01/2020 6,997,354
2,468,793 12.00 7/01/1999-6/01/2020 2,714,117
6,099,723 12.50 10/01/1999-7/01/2019 6,961,309
7,572,356 13.00 8/01/1999-2/01/2016 8,717,675
Federal Home Loan Mortgage Corporation 497,513 6.00 4/01/2009 446,672
Participation Certificates--Gold Program 926,232 6.50 5/01/2024 813,343
485,457 7.00 2/01/2009 456,174
115,864,995 7.00(4) 2/20/1998-10/01/1999 112,533,877
168,567,070 8.00(1)(2)(3) 7/15/2024 80,516,061
100,134,830 8.00 6/01/2024-10/01/2024 95,847,057
3,837,727 8.50 7/01/2008-12/01/2021 3,772,946
9,992,184 10.50 10/01/2020-12/01/2020 10,682,244
Federal Home Loan Mortgage 93-1635-E 43,530,243 5.45 1/15/2008 38,374,630
Corporation REMICs** 93-1604-E 105,716,536 5.50 3/15/2007 93,856,462
94-1684-F 55,394,132 5.75 8/15/2020 47,033,080
50,000,000 7.00 2/25/2018 46,750,000
93-1518-C 40,009,200 7.00 3/15/2019 35,458,154
90-190-F 2,743,338 9.20 10/15/2021 2,749,339
Federal National Mortgage 365,748 6.50 12/01/2008-5/01/2024 320,294
Association Mortgage-Backed 18,655 7.00 8/01/1999-6/01/2023 16,859
Securities 104,498 7.50 1/01/2008-6/01/2024 100,029
118,061,071 8.00 4/01/2017-9/01/2024 113,510,779
127,808,186 8.50(1)(2)(3) 10/25/2024 62,715,876
46,527,599 8.50 9/01/2004-11/01/2024 45,678,753
26,322 10.50 9/01/2000 27,712
65,612,123 11.00 2/01/2011-12/01/2020 71,517,214
141,585 11.50 1/01/2015-6/01/2015 157,026
3,106,621 13.00 8/01/2010-6/01/2015 3,553,197
Federal National Mortgage 93-214-EA 94,726,978 5.30 3/25/2007 83,034,117
Association REMICs** 93-123-S 15,529,411 8.044++ 7/25/2000 11,152,058
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C>
Government National Mortgage $164,546,101 7.00% 10/15/2017-6/15/2024 $ 146,291,357
Association Mortgage-Backed 313,228,590 7.50 1/15/2007-6/15/2024 288,364,505
Securities 241,814,794 8.00 1/15/2022-9/15/2024 229,873,980
214,814,622 8.50 1/15/2020-10/15/2024 210,114,478
19,036 10.00 2/15/2016 20,124
549,561 10.50 10/15/2014-4/15/2021 593,525
9,845,840 11.00 12/15/2009-1/15/2021 10,855,039
29,645 11.50 8/15/2013-4/15/2015 33,017
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,992,112,456) 1,911,371,576
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--8.54%
<C> <S> <C>
$57,000,000 Nikko Securities Co., purchased on 11/30/1994 to yield 5.70% to 12/01/1994 57,000,000
68,000,000 Nikko Securities Co., purchased on 11/30/1994 to yield 5.75% to 12/01/1994 68,000,000
93,000,000 Salomon Inc., purchased on 11/30/1994 to yield 5.60% to 12/01/1994 93,000,000
Total Repurchase Agreements (Cost--$218,000,000) 218,000,000
Total Investments (Cost--$2,808,698,986)--106.26% 2,711,310,476
Liabilities in Excess of Other Assets--(6.26%) (159,821,578)
--------------
Net Assets--100.00% $2,551,488,898
==============
Net Asset Class A--Based on net assets of $179,783,636 and 19,836,126 shares of
Value: beneficial interest outstanding. $ 9.06
==============
Class B--Based on net assets of $1,320,430,142 and 145,683,740 shares of
beneficial interest outstanding. $ 9.06
==============
Class C--Based on net assets of $1,002,624 and 110,634 shares of
beneficial interest outstanding. $ 9.06
==============
Class D--Based on net assets of $1,050,272,496 and 115,882,263 shares of
beneficial interest outstanding. $ 9.06
==============
<PAGE>
<FN>
*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.
(4)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year maturities.
++Adjustable Rate Security. The interest rate resets periodically and
inversely. The interest rate shown is the rate in effect as of
November 30, 1994.
</TABLE>
