MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
November 30, 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.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The move to lower interest rates during 1995 has been driven by
continuing economic releases that have indicated that the economy is
slowing. In our May 30, 1995 fiscal quarter shareholder report, we
reported that the Leading Economic Indicators Index (LEI) had been
negative for three consecutive months and that such a pattern had
accurately predicted all nine most recent past recessions (although
it had also predicted three recessions that never materialized). The
LEI has now been negative seven times in the past nine months. We
also reported that the National Association of Purchasing Managers
(NAPM) Index fell below 50 and that this was an indication of a
contraction in the manufacturing sector. The NAPM has now been below
50 for six of the last seven months. In addition, housing starts
have been in decline since August even though the decline in
interest rates has meant very attractive mortgage financing. This
does not bode well for the durable goods expenditure, which turned
negative in October. Also, predictions of consumer activity during
the all-important holiday season have been for far less than robust
retail sales. This is partly reflective of the huge level of debt
that is already saddling the consumer.
With so much of the economic data indicating an economic slowdown,
and some economists predicting a 1996 recession, investor attention
is focused on the activities of the Federal Reserve Board. The
Federal Reserve Board has been vigilant in fighting inflation and up
through the end of the November quarter had continued a restrictive
monetary policy in spite of the weak economic releases. This is
partly because third quarter gross domestic product was 4.2% after
second quarter growth of 1.3%. Third quarter growth was fueled by
extraordinarily large gains in residential investment and by
government expenditures.But in spite of economic growth, inflation
remains subdued as the Consumer Price Index (CPI) remains below 3%.
In fact, over the past five months the annualized rate for the CPI
is only 2.2%.
The combination of slow growth, low inflation and a potential budget
accord between the Congress and President Clinton continues to lead
most investors to expect that the Federal Reserve Board will ease
monetary policy and cut interest rates. (The Federal Reserve Board
did cut interest rates at its December 19, 1995 meeting.)
<PAGE>
Portfolio Strategy
The decline in interest rates in 1995 is a substantial reversal from
1994 when interest rates increased dramatically. The notable
difference lies in the front end of the yield curve where interest
rates remain unusually high as a result of the Federal Reserve
Board's restrictive monetary policy. (Monetary policy remains
restrictive despite the central bank's interest rate cut in
December.) At the end of November, 30-year and 10-year Treasury
yields were below year-end 1993 levels by 21 basis points (0.21%)
and 4 basis points, respectively, while 3-month Treasury bill yields
were actually higher by 241 basis points. The yield curve was very
flat with 1-year and 30-year yields closing the November quarter at
5.35% and 6.13%, respectively. The very short end of the yield curve
was actually inverted, with the three-month Treasury bill yielding
13 basis points more than the one-year Treasury bill. This reflects
both year-end pressures as well as expectations for a further easing
of monetary policy by the Federal Reserve Board.
Two things have limited the price appreciation of mortgage-backed
securities (MBS) during 1995. First, prepayment concerns again have
come to the forefront and memories of 1992 and 1993 are still vivid.
However, in our view, it is unlikely that prepayment speeds will
approach the levels reached in 1992 and 1993. Second, the flat yield
curve does not give added value to the front loaded principal
payments of MBS. These two issues caused MBS yields to remain
higher than the corresponding Treasury security. For an example, as
of the end of November, a two-point premium priced MBS (Federal
National Mortgage Association 7.50%) was yielding 132 basis points
over the Treasury curve. At year-end 1994, the yield spread on a
similarly-priced MBS was 118 basis points.
The Trust's portfolio is structured to take advantage of the
attractive MBS yield spreads. 83% of the portfolio is in MBS and 17%
in Treasury securities and cash equivalents. The focus continues to
be on coupon flow and yield curve positioning. It seems likely that
the yield curve will steepen, and this will be good for MBS, in our
opinion. With a steeper yield curve, the portfolio would look to
Treasury issues and collateralized mortgage obligations that "roll
down" the yield curve (or benefit from an upward movement in price
without a movement in yield) for incremental return.
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
<PAGE>
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
January 3, 1996
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 Fund'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).
<PAGE>
Performance data for all of the Trust's shares are presented in the
"Performance Summary" and "Recent Performance Results" tables on
pages 4 and 5. Data for the Fund's Class B Shares and Class D Shares
are presented in the "Average Annual Total Return" table below. Data
for Class A Shares and Class C Shares are also presented in the
"Aggregate Total Return" table below.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for all of the Trust's
shares for the 12-month and 3-month periods ended November 30, 1995.
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. 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.
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94)
through 9/30/95 +12.53% +8.03%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 9/30/95 +11.56% +10.56%
<PAGE>
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/95 +11.15% +7.15%
Inception (12/23/91)
through 9/30/95 + 5.08 +4.86
[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 9/30/95 +11.72% +7.25%
Five Years Ended 9/30/95 + 7.81 +6.93
Ten Years Ended 9/30/95 + 8.77 +8.33
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<PAGE>
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.16 $9.08 -- $0.129 + 0.54%
1/1/95--11/30/95 9.08 9.72 -- 0.591 +14.13
------
Total $0.720
Cumulative total return as of 11/30/95: +14.75%**
<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>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
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
1993 9.81 9.98 -- 0.481 + 6.73
1994 9.98 9.08 -- 0.523 - 3.81
1/1/95--11/30/95 9.08 9.71 -- 0.526 +13.24
------
Total $2.168
Cumulative total return as of 11/30/95: +22.67%**
<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 C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.16 $9.07 -- $0.115 + 0.28%
1/1/95--11/30/95 9.07 9.71 -- 0.521 +13.31
------
Total $0.636
Cumulative total return as of 11/30/95: +13.62%**
<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>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
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
1993 9.81 9.98 -- 0.532 + 7.27
1994 9.98 9.08 -- 0.571 - 3.32
1/1/95--11/30/95 9.08 9.71 -- 0.570 +13.76
------
Total $0.848 Total $8.610
Cumulative total return as of 11/30/95: +177.54%**
<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 were redesignated to Class D Shares.
</TABLE>
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
11/30/95 8/31/95 11/30/94 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.72 $9.61 $9.06 + 7.28% +1.14%
Class B Shares* 9.71 9.61 9.06 + 7.17 +1.04
Class C Shares* 9.71 9.61 9.06 + 7.17 +1.04
Class D Shares* 9.71 9.61 9.06 + 7.17 +1.04
Class A Shares--Total Return* +15.11(1) +2.86(2)
Class B Shares--Total Return* +14.12(3) +2.56(4)
Class C Shares--Total Return* +14.05(5) +2.55(6)
Class D Shares--Total Return* +14.71(7) +2.69(8)
Class A Shares--Standardized 30-day Yield 6.27%
Class B Shares--Standardized 30-day Yield 5.77%
Class C Shares--Standardized 30-day Yield 5.73%
Class D Shares--Standardized 30-day Yield 6.04%
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.669 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.163 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.596 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.145 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.590 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.143 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.645 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.157 per share ordinary
income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C>
US Government Obligations--15.25%
United States Treasury Notes $ 20,000,000 5.875% 8/15/1998 $ 20,228,200
175,000,000 8.875 2/15/1999 192,227,000
100,000,000 6.25 5/31/2000 102,797,000
5,000,000 6.125 7/31/2000 5,115,600
50,000,000 6.50 8/15/2005 52,617,000
Total US Government Obligations (Cost--$360,111,523) 372,984,800
US Government Agency Mortgage-Backed Obligations*--81.22%
Federal Home Loan Mortgage Corporation 744 10.00 7/01/2019 807
Participation Certificates 22,734,108 10.50 9/01/2000-9/01/2020 24,936,362
5,700,740 11.00 8/01/2010-9/01/2020 6,333,123
4,883,939 11.50 10/01/1998-12/01/2021 5,479,144
2,178,886 12.00 7/01/1999-6/01/2020 2,473,036
4,809,018 12.50 10/01/1999-12/01/2023 5,528,832
6,137,877 13.00 8/01/1999-2/01/2020 7,137,184
Federal Home Loan Mortgage Corporation 470,181 6.00 4/01/2009 461,511
Participation Certificates--Gold Program 147,263,042 6.50 2/01/2009-11/01/2010 146,894,885
48,881,768 7.00 1/01/2025 48,896,922
49,909,294 7.00(2) 8/01/1998-1/01/2000 50,673,405
9,975,212 7.225 11/01/1997 10,124,840
48,875,258 7.50 9/01/2025-10/01/2025 49,745,726
87,710,164 8.00 1/01/2007-5/01/2025 90,408,152
17,858,407 8.50 1/01/2025-7/01/2025 18,555,956
8,142,057 10.50 2/15/2017-12/01/2020 8,984,190
Federal Home Loan Mortgage Trust 171 79,350,654 8.00 7/15/2024 81,731,173
Corporation REMICs** Trust 134 2,830,318 9.00(1) 4/15/2022 650,973
Trust 1220 13,628,545 10.00 2/15/2022 14,862,807
<PAGE>
Federal National Mortgage Association 28,000,810 6.50 12/01/2008-1/01/2020 27,913,168
Mortgage-Backed Securities 108,829,060 7.00 6/01/2009-10/01/2025 109,361,865
109,411,739 7.50 12/01/2006-8/01/2025 111,606,026
156,303,511 8.00 7/01/2009-1/01/2025 161,244,990
146,385,411 8.50 3/01/2008-11/01/2025 152,144,670
2,107,719 8.50 5/01/2010 2,194,662
38,696,684 8.50(3) 7/15/2023 39,760,843
19,140 10.50 9/01/2000 20,193
52,254,070 11.00 2/01/2011-12/01/2020 58,671,393
139,159 11.50 1/01/2015-6/01/2015 157,815
2,608,742 13.00 8/01/2010-6/01/2015 3,058,749
Federal National Mortgage 93-123-S 15,529,411 7.129++ 7/25/2000 14,869,411
Association REMICs** 94-M4-A 27,656,469 9.055 8/25/2026 29,039,292
</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 $ 1,370,584 7.00% 4/15/2023-10/15/2025 $ 1,373,572
Mortgage-Backed Securities 363,987,983 7.50 1/15/2007-11/15/2025 371,493,415
138,556,052 8.00 6/15/2017-6/15/2025 143,361,176
64,988,926 8.50 3/15/2017-6/01/2025 67,852,338
32,271,884 9.50 4/15/2016-10/15/2018 34,732,616
75,739,257 10.00 12/15/2015-12/15/2021 82,971,240
354,494 10.50 10/15/2014-4/15/2021 394,927
19,885 11.50 8/15/2013-4/15/2015 22,669
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,939,460,566) 1,986,124,058
Face
Amount Issue
Repurchase Agreements***--2.29%
$56,000,000 Nikko Securities Co., purchased on 11/30/1995 to yield 5.93% to 12/01/1995 56,000,000
Total Repurchase Agreements (Cost--$56,000,000) 56,000,000
<PAGE>
Total Investments (Cost--$2,355,572,089)--98.76% 2,415,108,858
Other Assets Less Liabilities--1.24% 30,441,839
--------------
Net Assets--100.00% $2,445,550,697
==============
Net Asset Class A--Based on net assets of $232,133,484 and 23,892,083 shares of
Value: beneficial interest outstanding $ 9.72
==============
Class B--Based on net assets of $1,232,312,378 and 126,848,792 shares of
beneficial interest outstanding $ 9.71
==============
Class C--Based on net assets of $17,814,047 and 1,834,042 shares of
beneficial interest outstanding $ 9.71
==============
Class D--Based on net assets of $963,290,788 and 99,163,196 shares of
beneficial interest outstanding $ 9.71
==============
<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
November 30, 1995.
*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>
