MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
May 31, 1995
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
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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 three months ended May 31, 1995 showed a dramatic change from
the prior three-month period. Fourth quarter 1994's gross domestic
product (GDP) growth was 5.1%, and 1995 began with concerns of an
overheating economy. Unemployment was down to 5.4%, consumer
confidence was high, commodity prices were increasing, and capacity
utilization was running at a 15-year high. Inflationary pressures
were everywhere, but actual inflation remained at 2.4% as measured
by the change in consumer prices in 1994. The Federal Reserve Board,
in a series of preemptive strikes against inflation, had increased
short-term interest rates seven times since February 1994. In
addition to domestic considerations there was also pressure to
increase interest rates in order to support the US dollar which
declined significantly against many currencies, most notably the yen
and Deutschemark. Popular conjecture was that more interest rate
increases were inevitable for 1995.
However, recent economic data indicate that the economy may finally
be slowing. In fact, a recent report showed a decline from 52 to
46.1 in the National Association of Purchasing Managers Index. A
level below 50 indicates contracting economic conditions in the
manufacturing sector. This, coupled with an employment report
indicating a significant decline in manufacturing jobs, led to
concerns that the planned "soft landing" of the economy could turn
into an actual recession. First quarter 1995 GDP fell to 2.7% and
second quarter growth forecasts are flat to negative. Leading
economic indicators fell for the third consecutive month, which
historically have forecast a recession. Although a recession does
not always follow, this Index accurately predicted all nine post-war
recessions. The consensus in the financial markets is that the
Federal Reserve Board will ease monetary policy rather than
continuing to tighten. This is illustrated by the short end of the
yield curve becoming inverted, with three-month interest rates
higher than 12-month interest rates.
<PAGE>
So far in 1995 interest rates have declined significantly, reversing
the trend of 1994. The 30-year Treasury bond yield is 6.65%, which
is 123 basis points (1.23%) lower than at year-end. Ten-year and
five-year Treasury note yields are down 155 basis points and 178
basis points and currently stand at 6.28% and 6.05%, respectively.
Although one-year Treasury bills decreased 137 basis points, three-
month interest rates actually increased 11 basis points.
With concerns of restrictive monetary policy behind them, fixed-
income investors returned to basic fundamental economic analysis.
Intermediate-term and long-term interest rates have retraced most of
the sell-off that began in 1994, which was the worst bond market on
record, as interest rates climbed 3.58% in one-year maturities and
2.04% in ten-year maturities. In contrast, total returns for year-to-
date 1995 have been stellar. For example, two-year, five-year and
ten-year Treasury notes returned +6.28%, +10.50% and +13.52%,
respectively. This compares with returns of +0.34%, -4.26% and -6.45%
for the full year 1994.
Despite the fact that interest rates have come a long way in 1995,
they are far from overvalued on a fundamental basis. Since inflation
will most likely remain at a peak below 3.50% for this cycle, real
(inflation-adjusted) rates of return in excess of 3% are currently
available on longer maturities and prospects of continued slower
economic activity bode well for the short term. So, although a
significant rally is behind us, there is limited risk of a major
correction, in our view. Therefore we remain constructive on the
bond market outlook.
Portfolio Matters
Recent interest rate declines rekindled prepayment concerns, since
once again the environment is conducive for mortgage refinancings.
The Mortgage Bankers Association Refinance Index increased from 41.8
at the end of 1994 to its current level of 128.7, its highest level
in over one year. For a myriad of reasons, it is unlikely to reach
its 1993 peak levels. However, prepayment concerns are beginning to
affect price levels. They are leading to much shorter estimates of
average life. For example, a security with a year-end 1994 eight-
year average life now has a five-year average life. This shortening
dampens price appreciation.
Although Treasury securities have a more certainaverage life, the
recent widening in yield spreads between mortgage-backed securities
(MBS) and Treasury securities has made it compelling to own MBS. We
reduced the Fund's Treasury and Treasury-like collateralized
mortgage obligation (CMO) holdings to just 23% of net assets, down
from 35% at year-end. If the rally continues, the portfolio will
move lower in coupon to maintain duration (average life). However,
as we did in early 1994, we will focus on non 30-year mortgages in
order to avoid extension risk should prepayment concerns prove to be
overdone.
<PAGE>
As of May 31, 1995, the portfolio structure was Treasury securities,
16% of net assets; MBS, 76%; CMO, 7%; and cash reserves, 1%. Within
the MBS portfolio, 66% was in coupons 8% and lower, which are not
yet a high risk for refinancing. We are weighted more heavily in
Government National Mortgage Association securities as these
typically prepay more slowly than their Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation counterparts.
As such, there is a notable void in refinancing coupons of 9% and
9.50% because of high risk. We added positions in high-coupon (10%)
securities that were issued eight or nine years ago. These
homeowners did not take advantage of the 1992/1993 refinancing
opportunity, and we believe it is unlikely they will do so at this
time.
Portfolio returns are closely tied to interest rate changes.
However, yield spreads play an important part within that context.
MBS yield spreads are currently attractive and should prepayment
estimates prove to be exaggerated, this period of wide spreads will
prove to be an opportunity to add high-quality, high-yielding MBS to
the portfolio.
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
June 23, 1995
<PAGE>
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Trust 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, as
detailed in the Trust's prospectus. 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, which, in the
case of certain eligible investors, were simultaneously exchanged
for Class A Shares.
* 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 approximately 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 Trust's Class B Shares and Class D Shares
are presented in the "Performance Summary," "Recent Performance
Results" and the "Average Annual Total Return" tables on pages 4 and
5. Data for Class A Shares and Class C Shares are also presented in
the "Recent Performance Results" and "Aggregate Total Return" tables
on page 4.
The "Recent Performance Results" table 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 May 31, 1995 and
for Class A and Class C Shares for the since inception and 3-month
periods ended May 31, 1995. All data in this table assume imposition
of the actual total expenses incurred by each class of shares during
the relevant period.
<PAGE>
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. 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.
PERFORMANCE DATA (continued)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/95 2/28/95 5/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.62 $9.36 $9.16 +5.02% +2.78%
Class B Shares* 9.62 9.36 9.40 +2.34 +2.78
Class C Shares* 9.62 9.36 9.16 +5.02 +2.78
Class D Shares* 9.62 9.36 9.40 +2.34 +2.78
Class A Shares--Total Return* +9.73(1) +4.71(2)
Class B Shares--Total Return* +8.75(3) +4.40(4)
Class C Shares--Total Return* +9.10(5) +4.38(6)
Class D Shares--Total Return* +9.43(7) +4.64(8)
Class A Shares--Standardized 30-day Yield 6.54%
Class B Shares--Standardized 30-day Yield 6.04%
Class C Shares--Standardized 30-day Yield 5.98%
Class D Shares--Standardized 30-day Yield 6.30%
<FN>
*Investment results shown do not reflect sales charges; results
shown 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 $0.388 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.167 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.566 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.149 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.344 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.147 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.613 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.161 per share ordinary
income dividends.
</TABLE>
<PAGE>
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/95 +3.60% -0.30%
Inception (12/23/91)
through 3/31/95 +3.91 +3.62
[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 3/31/95 +4.14% -0.02%
Five Years Ended 3/31/95 +7.53 +6.66
Ten Years Ended 3/31/95 +9.21 +8.76
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
<PAGE>
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94)
through 3/31/95 +5.40% +1.18%
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 3/31/95 +5.03% +4.03%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
<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
1994 9.98 9.08 -- 0.523 -3.81
1/1/95--5/31/95 9.08 9.62 -- 0.232 +8.71
------
Total $1.874
Cumulative total return as of 5/31/95: +17.76%**
<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>
<PAGE>
<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
1994 9.98 9.08 -- 0.571 - 3.32
1/1/95--5/31/95 9.08 9.62 -- 0.250 + 9.04
------ ------
Total $0.848 Total $8.290
Cumulative total return as of 5/31/95: +166.02%**
<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 Trust outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C> <C>
US Government Agency Discount Obligations*--8.70%
Federal Home Loan Bank $ 51,000,000 5.88 % 6/15/1995 $ 50,883,380
101,000,000 5.88 6/19/1995 100,703,060
Federal National Mortgage Corporation 30,000,000 5.84 6/13/1995 29,941,600
40,000,000 5.86 6/19/1995 39,882,800
<PAGE>
Total US Government Agency Discount Obligations (Cost--$221,410,840) 221,410,840
US Government Obligations--16.13%
United States Treasury Notes 180,000,000 8.25 7/15/1998 191,586,600
200,000,000 8.875 2/15/1999 218,844,000
Total US Government Obligations (Cost--$398,676,893) 410,430,600
US Government Agency Mortgage-Backed Obligations**--83.74%
Federal Home Loan Mortgage Corporation 752 10.00 7/01/2019 805
Participation Certificates 25,476,581 10.50 9/01/2000-9/01/2020 27,307,583
6,447,323 11.00 8/01/2010-9/01/2020 6,942,928
5,539,181 11.50 10/01/1998-6/01/2020 5,990,956
2,337,230 12.00 7/01/1999-6/01/2020 2,543,187
5,432,563 12.50 10/01/1999-7/01/2019 6,030,145
6,984,505 13.00 8/01/1999-2/01/2016 7,805,184
Federal Home Loan Mortgage Corporation 486,308 6.00 4/01/2009 472,478
Participation Certificates--Gold Program 52,849,541 7.00(2) 4/01/1997-4/01/2000 53,526,544
24,500,009 7.50 2/01/2023-5/01/2025 24,614,669
152,047,245 8.00 6/01/2024-5/01/2024 155,325,384
3,517,402 8.50 7/01/2008-12/01/2021 3,638,295
8,924,356 10.50 10/01/2020-12/01/2020 9,632,682
Federal Home Loan Mortgage 93-1604-E 105,716,536 5.50 3/15/2007 101,653,057
Corporation REMICs*** GN29P 50,000,000 7.00 2/25/2018 50,390,650
Trust 171 82,824,212 8.00 7/15/2024 84,609,903
Trust 134 3,082,587 9.00(1) 4/15/2022 987,383
90-190-F 1,564,704 9.20 10/15/2021 1,572,526
Federal National Mortgage 881 6.50 12/01/2008 871
Association Mortgage-Backed 89,542,843 7.50 8/01/2023-2/01/2025 90,730,858
Securities 249,156,969 8.00 6/01/2009-1/01/2025 255,841,818
207,996,040 8.50 3/01/2008-5/01/2025 215,023,889
41,790,668 8.50(3) 7/15/2023 43,083,567
23,033 10.50 9/01/2000 24,214
58,852,535 11.00 2/01/2011-12/01/2020 64,038,621
140,399 11.50 1/01/2015-6/01/2015 153,473
2,903,057 13.00 8/01/2010-6/01/2015 3,251,424
<PAGE>
Federal National Mortgage 93-123-S 15,529,411 6.825++ 7/25/2000 13,845,440
Association REMICs*** 94-M4-A 28,580,526 9.055 8/25/2026 29,929,170
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C>
US Government Agency Mortgage-Backed Obligations** (concluded)
Government National Mortgage Association $146,705,494 7.00% 9/15/2008-6/15/2024 $ 145,478,574
Mortgage-Backed Securities 304,767,431 7.50 1/15/2007-6/15/2024 306,672,227
143,853,127 8.00 6/15/2017-3/15/2025 147,403,422
70,590,163 8.50 3/15/2017-12/15/2024 73,281,060
34,900,000 9.50 4/15/2016-10/15/2018 37,103,063
84,046,745 10.00 12/15/2015-12/15/2021 91,085,660
488,180 10.50 10/15/2014-4/15/2021 534,401
2,309,400 11.00 1/15/2010-12/15/2017 2,554,773
25,858 11.50 8/15/2013-4/15/2015 28,864
Total US Government Agency Mortgage-Backed Obligations (Cost--$2,009,104,962) 2,063,109,748
<CAPTION>
Face
Amount Issue
Repurchase Agreements****--1.53%
<C> <S> <C>
$39,000,000 Nikko Securities Co., purchased on 5/31/1995 to yield 6.17% to 6/01/1995 39,000,000
Total Repurchase Agreements (Cost--$39,000,000) 39,000,000
Total Investments (Cost--$2,668,192,695)--110.10% 2,733,951,188
Liabilities in Excess of Other Assets--(10.10%) (188,741,552)
--------------
Net Assets--100.00% $2,545,209,636
==============
<PAGE>
Net Asset Class A--Based on net assets of $212,009,652 and 22,041,705 shares of
Value: beneficial interest outstanding $ 9.62
==============
Class B--Based on net assets of $1,298,906,241 and 135,054,344 shares of
beneficial interest outstanding $ 9.62
==============
Class C--Based on net assets of $9,800,529 and 1,019,197 shares of
beneficial interest outstanding $ 9.62
==============
Class D--Based on net assets of $1,024,493,214 and 106,529,191 shares of
beneficial interest outstanding $ 9.62
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year maturities.
(3)Federal Housing Administration/Veterans' Administration mortgages
packaged by the Federal National Mortgage Association.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
May 31, 1995.
*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.
</TABLE>
