MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
May 31, 1996
Officers and Trustees
Arthur Zeikel, President and Trustee
Joe Grills, Trustee
Walter Mintz, Trustee
Robert S. Salomon Jr., Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, 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
Ira P. Shapiro, 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.
<PAGE>
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
During the May quarter, there was a marked change in the investor
outlook on interest rates. From early March, when non-farm payroll
was announced with an expansion of 705,000 new jobs, to early May,
when gross domestic product growth was reported at 2.8%, investor
anticipation of two more interest rate cuts in 1996 shifted to
pricing in two interest rate increases. Even after these numbers
were revised to 509,000 and 2.3%, respectively, conventional wisdom
was that the Federal Reserve Board would tighten credit in an effort
to slow economic growth and control inflation. The noninflationary
growth level is typically estimated at 2.50% or lower. The reversal
in outlook and the magnitude of the change was dramatic.
In our February report to shareholders, we said that the industrial
sector was mired in near-recessionary conditions as reflected in the
National Association of Purchasing Managers Index remaining below 50
for seven consecutive months. A level below 50 indicates a
contracting manufacturing sector. However, the May 1, 1996 release
was 50.1, portending better days ahead.
The Index of Leading Economic Indicators (LEI), as reported in past
shareholder reports, has been predicting a recession for some time.
However, this forecast has apparently changed. In April, the LEI
reported a positive 1.3% and remained positive for both the May and
June releases. Also, consumer confidence was 104.8 in April, the
highest level since early 1990. This indicates that the consumer is
likely to continue to spend even though the rate of consumer credit
growth is high and the consumer debt/disposable income ratio has
never been greater.
Although the economy is picking up, inflation was quite muted. As
measured by the Consumer Price Index, inflation has been below 3%
for a prolonged period of time. The Producer Price Index shows
inflation to be even slower. This suggests that there can be growth
without corresponding inflation and that current interest rate
levels may be higher than necessary.
<PAGE>
Portfolio Strategy
During the early months of 1996, interest rates increased
significantly in medium-term and longer-term maturities. Three-year
and ten-year Treasury notes increased over 120 basis points (1.20%).
In contrast, the three-month Treasury bill increased only 11 basis
points. This steepening of the yield curve can be seen in the spread
between three-month and ten-year issues moving from just 50 basis
points at the beginning of the year to 167 basis points at the end
of the May quarter.
With the back up in interest rates, mortgage prepayment fears
diminished greatly. It is noteworthy that in January 1996, 98% of
the mortgage pass-through market was priced above $99. By May 1996,
80% of the market was priced at a discount. In fact, Government
National Mortgage Association 7.50% securities (the Trust's largest
single position) closed the May quarter at a price of $97.75, a
substantial discount. For these securities, and others priced below
par, prepayments actually increase the yield.
With a view that real interest rates (adjusted for inflation) are
attractive, the portfolio is fully invested with only 2% of net
assets in short-term securities. Also, the yield spreads between
mortgage-backed securities (MBS) and similar average life Treasury
securities are relatively wide, making MBS an attractive investment,
in our view. This is especially true given the absence of a major
prepayment incentive. As such, 85% of the Trust's net assets are in
MBS, with a strong emphasis on coupons below 8%.
There continues to be a 10% position in high-coupon, seasoned MBS.
These are mortgages that were issued before 1990 and where the
homeowner has not acted on past refinancing opportunities. With high
coupons and slow prepayments, these securities have performed well.
Finally, the limited Treasury position (12% of net assets) is
structured at the two-year--six-year part of the yield curve to take
advantage of rolling down the yield curve (or benefiting from an
upward movement in price without a change in interest rates) for
incremental income.
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
June 24, 1996
PERFORMANCE DATA
About Fund Performance
Investors are 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.
<PAGE>
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
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>
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%
1995 9.08 9.78 -- 0.665 +15.46
1/1/96--5/31/96 9.78 9.41 -- 0.254 - 1.12
------
Total $1.048
Cumulative total return as of 5/31/96: +14.79%**
<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**
<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
1995 9.08 9.77 -- 0.592 +14.47
1/1/96--5/31/96 9.77 9.40 -- 0.224 - 1.44
------
Total $2.458
Cumulative total return as of 5/31/96: +22.21%**
<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 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%
1995 9.07 9.77 -- 0.586 +14.53
1/1/96--5/31/96 9.77 9.40 -- 0.222 - 1.46
------
Total $0.923
Cumulative total return as of 5/31/96: +13.17%**
<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 (continued)
<PAGE>
<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
1995 9.08 9.77 -- 0.641 +15.06
1/1/96--5/31/96 9.77 9.40 -- 0.244 - 1.23
------ ------
Total $0.848 Total $8.925
Cumulative total return as of 5/31/96: +177.27%**
<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>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/96 + 9.51% +5.13%
Inception (10/21/94)
through 3/31/96 +10.44 +7.36
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/96 +8.68% +4.68%
Inception (12/23/91) through 3/31/96 +5.00 +5.00
[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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/96 +8.51% +7.51%
Inception (10/21/94) through 3/31/96 +9.48 +9.48
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/96 +9.24% +4.87%
Five Years Ended 3/31/96 +6.80 +5.93
Ten Years Ended 3/31/96 +7.83 +7.39
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/96 2/29/96 5/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.41 $9.66 $9.62 -2.18% -2.59%
Class B Shares* 9.40 9.66 9.62 -2.29 -2.69
Class C Shares* 9.40 9.66 9.62 -2.29 -2.69
Class D Shares* 9.40 9.66 9.62 -2.29 -2.69
Class A Shares--Total Return* +4.61(1) -0.94(2)
Class B Shares--Total Return* +3.78(3) -1.24(4)
Class C Shares--Total Return* +3.73(5) -1.25(6)
Class D Shares--Total Return* +4.23(7) -1.11(8)
Class A Shares--Standardized 30-day Yield 5.84%
Class B Shares--Standardized 30-day Yield 5.34%
Class C Shares--Standardized 30-day Yield 5.29%
Class D Shares--Standardized 30-day Yield 5.61%
<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 $0.659 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.168 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.584 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.148 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.579 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.147 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.635 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.162 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--12.61%
United States Treasury Notes $ 38,000,000 5.875 % 4/30/1998 $ 37,762,500
175,000,000 8.875 2/15/1999 185,500,000
42,000,000 6.375 5/15/1999 41,940,780
United States Treasury STRIPS++++ 20,000,000 5.72(4) 11/15/2001 13,941,000
Total US Government Obligations (Cost--$276,865,703) 279,144,280
US Government Agency Mortgage-Backed Obligations*--86.60%
Federal Home Loan Mortgage Corporation 735 10.00 7/01/2019 798
Participation Certificates 20,342,086 10.50 9/01/2000-9/01/2020 22,261,768
4,978,249 11.00 8/01/2010-9/01/2020 5,511,818
4,064,587 11.50 10/01/1998-6/01/2020 4,548,517
1,840,939 12.00 7/01/1999-6/01/2020 2,092,908
4,294,754 12.50 10/01/1999-7/01/2019 4,949,703
5,559,192 13.00 8/01/1999-2/01/2016 6,485,131
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C>
US Government Agency Mortgage-Backed Obligations* (concluded)
Federal Home Loan Mortgage Corporation $ 447,202 6.00 % 4/01/2009 $ 419,252
Participation Certificates--Gold Program 93,551,009 6.50 8/01/2010-11/01/2010 89,837,969
9,924,177 7.225(2) 11/01/1997 9,983,102
47,165,993 7.50 8/01/2025-10/01/2025 46,222,673
35,670,582 8.00 1/01/2007-8/01/2010 36,238,814
14,687,301 8.50 1/01/2025-7/01/2025 15,003,959
7,148,415 10.50 10/01/2020-12/01/2020 7,798,421
Federal Home Loan Mortgage Trust 171 71,937,158 8.00 7/01/2024 72,093,981
Corporation REMICs** Trust 134 2,502,081 9.00(1) 4/15/2022 673,210
Trust 1220 11,983,368 10.00 2/15/2022 13,054,077
<PAGE>
Federal National Mortgage Association 70,297,415 6.00 2/01/2026-5/01/2026 63,201,594
Mortgage-Backed Securities 100,500,865 6.50 12/01/2025-5/01/2026 93,120,107
186,876,522 7.00 4/01/2010-5/01/2026 180,876,886
214,141,403 7.50 12/01/2006-1/01/2026 210,444,628
50,001,203 8.00 7/01/2009-1/01/2025 50,336,170
89,034,739 8.50 5/01/2010-11/01/2025 90,950,469
35,147,309 8.50(3) 7/15/2023 36,081,173
29,494,441 9.50 3/01/2020 31,466,882
16,539 10.50 9/01/2000 17,500
45,985,924 11.00 2/01/2011-12/01/2020 51,187,852
137,828 11.50 1/01/2015-6/01/2015 154,540
2,266,540 13.00 8/01/2010-6/01/2015 2,643,352
Federal National Mortgage 93-123-S 15,529,411 8.65312++ 7/25/2000 15,344,999
Association REMICs** 94-M4-A 24,863,883 9.03781 6/25/2023 25,602,030
Government National Mortgage Association 101,624,286 7.00 4/15/2023-3/15/2026 96,701,606
Mortgage-Backed Securities 400,793,622 7.50 1/15/2007-4/15/2026 391,900,012
155,185,642 8.00 1/01/2020-7/15/2025 155,525,683
10,672,814 8.50 2/15/2023-3/15/2026 10,919,569
66,839,415 10.00 12/15/2015-12/15/2021 73,113,983
332,012 10.50 10/15/2014-4/15/2021 366,459
1,253 11.00 1/15/2016 1,400
14,960 11.50 8/15/2013-4/15/2015 16,909
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,943,608,148) 1,917,149,904
Face Amount Issue
Repurchase Agreements***--1.08%
$ 24,000,000 Nikko Securities Co., purchased on 5/31/1996 to yield 5.33% to 6/03/1996 24,000,000
Total Repurchase Agreements (Cost--$24,000,000) 24,000,000
US Government & Agency Discount Obligations****--19.09%
Federal Home Loan Bank:
65,000,000 5.19% due 6/17/1996 65,367,799
92,415,000 5.21% due 6/17/1996 92,227,757
Federal Home Loan Mortgage Corporation:
50,000,000 5.18% due 6/12/1996 49,935,250
115,574,000 5.19% due 6/17/1996 115,340,733
100,000,000 5.21% due 6/19/1996 99,768,445
Total US Government & Agency Discount Obligations (Cost--$422,639,984) 422,639,984
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Par Strike Callable
Value Issue Price From Value
<S> <C> <S> <C> <S> <C>
Options Purchased--0.07%
Call Options $70,024,204 Federal Home Loan Corporation--
Purchased Gold Program, 15-Year, 7% 100 March 1996 $ 280,097
49,476,115 Federal Home Loan Corporation--
Gold Program, 15-Year, 7% 100 April 1996 217,695
20,922,014 Federal Home Loan Corporation--
Gold Program, 15-Year, 7% 100 May 1996 96,241
28,601,436 Federal Home Loan Corporation--
Gold Program, 15-Year, 7% 100 September 1996 128,706
United States Treasury Notes:
41,000,000 5.625% due 2/15/2006 92.156 7/08/1996(5) 360,800
35,000,000 6.875% due 5/15/2006 101.5 7/08/1996(5) 388,500
Total Options Purchased (Cost--$4,387,076) 1,472,039
Total Investments (Cost--$2,671,500,911)--119.45% 2,644,406,207
Options Written--(0.03%)
Call Options 67,500,000 Federal Home Loan Mortgage
Written Corporation--Gold Program,
30-Year, 8% 101.109 7/08/1996(5) (391,500)
50,000,000 Federal National Mortgage
Association, 30-Year, 6.50% 93.375 7/08/1996(5) (330,000)
Total Options Written (Premium Received--$983,984) (721,500)
Total Investments Net of Options Written (Cost--$2,670,516,927)--119.42% 2,643,684,707
Liabilities in Excess of Other Assets--(19.42%) (429,902,400)
--------------
Net Assets--100.00% $2,213,782,307
==============
<PAGE>
Net Asset Class A--Based on net assets of $226,702,154 and 24,102,169 shares of
Value: beneficial interest outstanding $ 9.41
==============
Class B--Based on net assets of $1,008,530,540 and 107,234,983 shares of
beneficial interest outstanding $ 9.40
==============
Class C--Based on net assets of $22,616,418 and 2,405,090 shares of
beneficial interest outstanding $ 9.40
==============
Class D--Based on net assets of $955,933,195 and 101,646,002 shares of
beneficial interest outstanding $ 9.40
==============
<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/Veteran's Administration Mortgages
packaged by the Federal National Mortgage Association.
(4)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Trust.
(5)Represents European call options callable only on notification
date.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
May 31, 1996.
++++STRIPS--Separate Trading of Registered Interest and Principal of
Securities.
*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.
****Certain US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Trust.
</TABLE>
