MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
November 30, 1996
<PAGE>
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
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>
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
After exhibiting strong growth in the second quarter, US economic
activity moderated in the third quarter as gross domestic product
(GDP) was reported to have risen at a 2.0% rate. Consequently, the
US bond market staged a momentous rally during the period, as
investor fears of a rapidly expanding economy subsided. The US
economy is currently enjoying its most favorable environment in more
than two decades. Inflation is at its lowest rate in more than 30
years, the unemployment rate is near its lowest level in 23 years,
and the US Federal budget deficit is at a 22-year low.
The November 1996 US election results provided a favorable backdrop
to the bond market rally during the November quarter. The
Republican/Democrat split in Government reassured investors that a
system of checks and balances should prevail over any future course
of fiscal policy. Meanwhile, several sectors of the economy slowed
noticeably from their second-quarter strength. Housing demand has
slackened. New housing starts and permits fell in October to their
lowest level in more than 12 months. In addition, job growth slowed
as well. Non-farm payroll growth, which averaged 240,000 new jobs
through the first eight months of 1996, slowed to an average of
113,000 new jobs over the last three months through November. As a
result, the unemployment rate rose slightly in November to 5.4%.
Rising wages, which unsettled the bond market throughout much of
1996, apparently have had no inflationary impact on the US economy.
Although hourly earnings are higher, rising at a 3.5% rate on a year-
over-year basis through November, the core consumer price index
still continues to run at a 30-year low, rising just 2.6% on a year-
over-year basis. More importantly, wholesale inflation is actually
decelerating. The core producer price index has risen just 0.9% on a
year-over-year basis through October after rising 2.5% at the start
of the year.
While some sectors of the US economy have slowed, overall economic
activity is far from weak and remains on a moderate non-inflationary
growth path. Despite some investor speculation that the Federal
Reserve Board will ease monetary policy early next year to thwart
impending recessionary conditions in 1997, we expect fourth-quarter
GDP growth to be similar to third-quarter growth and believe that a
recessionary outlook is too premature. At this point, we do not see
any overt influences altering the current track of economic growth.
As such, we expect the Federal Reserve Board to refrain from
changing monetary policy during the remainder of this year and into
early 1997.
<PAGE>
Portfolio Strategy
In our August report to shareholders, we expressed the view that
real interest rates (adjusted for inflation) were attractive and
that the portfolio was fully invested. Over the past November
quarter, there was a significant downward movement in interest rates
as investors became more comfortable with a slowing economy and
continued subdued inflation. Two-year Treasury note yields declined
by 75 basis points (0.75%) to end the quarter at 5.58%. Five-year
and ten-year Treasury note yields were both lower by approximately
90 basis points, ending the quarter at 5.83% and 6.05%,
respectively. Surprisingly, short-term interest rates (those of less
than six months) were lower by less than 25 basis points, reflecting
a further flattening of the yield curve.
With the significant change in interest rates during the November
quarter, it follows that longer-term securities would outperform
those with shorter maturities. Two-year, five-year and ten-year
Treasury note returns were +2.87%, +5.31% and +8.07%, respectively.
Also, with a significant rally Treasury securities generally
outperform mortgage-backed securities (MBS) as prepayment concerns
over refinancing activity serves to dampen price appreciation on
MBS. This is especially true for a short time period as price
changes are immediate and the yield advantage of MBS comes over
time. However, high-quality, high-yielding MBS have been in demand
recently, causing yield spreads to tighten compared to Treasury
securities. For the quarter, while a Federal Home Loan Mortgage
Corporation (FHLMC) 6% MBS returned +7.29%, the ten-year Treasury
return was +8.07%. However, for the year-to-date, the FHLMC 6% MBS
has a better return, +4.15% as compared to +2.20% for the Treasury
issue. FHLMC 7.50% MBS outperformed the five-year Treasury bond for
both the quarter (+5.59% as compared to +5.31%, respectively) and
year-to-date (+5.92% as compared to +3.54%, respectively).
The investor demand for MBS will probably continue into 1997 as
yields are attractive relative to similar maturities in Treasury
securities and corporate securities, and prepayment concerns have
diminished. Therefore, the portfolio is heavily weighted in MBS with
90% of net assets in that sector. As protection against prepayments
in the MBS portion of the portfolio, our main focus is in lower-
coupon MBS (7.50% and lower) or higher-coupon seasoned MBS where the
homeowner did not take advantage of prior refinancing incentives.
Also, 7% of the portfolio's net assets is in FHLMC and Federal
National Mortgage Association guaranteed multi-family securities
where prepayment penalties protect against an unwanted refinancing.
Treasury securities represent 6% of the portfolio's net assets, and
the net cash position is 4%. These positions, along with the very
high-coupon MBS (10%--13%), have short durations and help offset the
longer durations of lower-coupon MBS.
<PAGE>
With the dramatic decline in interest rates during the November
quarter, we are approaching more neutral real interest rate levels
for longer-term securities. However, the short end of the yield
curve still seems out of line, and we continue to expect a
steepening in the yield curve which would benefit MBS holdings.
Going into 1997, we expect that yield and yield curve positioning
will be the major components of 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
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
December 31, 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:
<PAGE>
* 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. (There is no initial
sales charge for automatic share conversions.)
* 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).
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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
11/30/96 8/31/96 11/30/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.68 $9.40 $9.72 -0.41% +2.98%
Class B Shares* 9.68 9.40 9.71 -0.31 +2.98
Class C Shares* 9.68 9.40 9.71 -0.31 +2.98
Class D Shares* 9.68 9.40 9.71 -0.31 +2.98
Class A Shares--Total Return* +6.46(1) +4.72(2)
Class B Shares--Total Return* +5.75(3) +4.53(4)
Class C Shares--Total Return* +5.70(5) +4.51(6)
Class D Shares--Total Return* +6.30(7) +4.66(8)
Class A Shares--Standardized 30-day Yield 5.97%
Class B Shares--Standardized 30-day Yield 5.46%
Class C Shares--Standardized 30-day Yield 5.41%
Class D Shares--Standardized 30-day Yield 5.73%
<PAGE>
<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 $0.647 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.163 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.572 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.144 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.567 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.143 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.622 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.157 per share ordinary
income dividends.
</TABLE>
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--11/30/96 9.78 9.68 -- 0.573 + 5.20
------
Total $1.367
Cumulative total return as of 11/30/96: +22.13%**
<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>
<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--11/30/96 9.77 9.68 -- 0.507 + 4.58
------
Total $2.741
Cumulative total return as of 11/30/96: +29.67%**
<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>
<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--11/30/96 9.77 9.68 -- 0.502 + 4.53
------
Total $1.203
Cumulative total return as of 11/30/96: +20.05%**
<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)
<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--11/30/96 9.77 9.68 -- 0.551 + 5.07
------ ------
Total $0.848 Total $9.232
Cumulative total return as of 11/30/96: +194.95%**
<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>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/96 +5.09% +0.88%
Inception (10/21/94)
through 9/30/96 +9.00 +6.74
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/96 +4.27% +0.34%
Inception (12/23/91)
through 9/30/96 +4.91 +4.91
[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 9/30/96 +4.33% +3.35%
Inception (10/21/94)
through 9/30/96 +8.12 +8.12
[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 9/30/96 +4.82% +0.63%
Five Years Ended 9/30/96 +5.88 +5.02
Ten Years Ended 9/30/96 +7.64 +7.20
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<PAGE>
US Government Obligations--6.36%
<S> <C> <C> <S> <C>
United States Treasury Notes $125,000,000 8.875 % 2/15/1999 $ 133,281,250
Total US Government Obligations (Cost--$131,334,560) 133,281,250
US Government Agency Mortgage-Backed Obligations*--89.71%
Federal Home Loan Mortgage Corporation 725 10.00 7/01/2019 794
Participation Certificates 17,619,371 10.50 9/01/2000-9/01/2020 19,629,036
4,208,901 11.00 8/01/2010-9/01/2020 4,740,275
3,475,524 11.50 10/01/1998-6/01/2020 3,953,408
1,612,912 12.00 7/01/1999-6/01/2020 1,862,397
3,781,178 12.50 10/01/1999-7/01/2019 4,427,495
4,782,298 13.00 8/01/1999-2/01/2016 5,667,023
Federal Home Loan Mortgage Corporation 422,210 6.00 4/01/2009 414,952
Participation Certificates--Gold Program 90,688,221 6.50 8/01/2010-6/01/2011 90,319,247
100,000,000 6.775(7)+++ 11/01/2003 101,976,000
146,466,141 7.00 6/01/2010-12/01/2011 147,713,190
9,880,116 7.225(2)+++ 11/01/1997 9,952,673
36,123,311 7.50 5/01/2009-9/01/2026 36,928,723
70,087,102 8.00 1/01/2007-9/01/2026 72,318,618
13,809,948 8.50 1/01/2025-7/01/2025 14,396,871
6,169,845 10.50 10/01/2020-12/01/2020 6,856,241
Federal Home Loan Mortgage Trust 134 2,281,995 9.00(1) 4/15/2022 568,354
Corporation REMICs** Trust 1220 99,530,244 10.00 2/15/2022 11,801,456
Federal National Mortgage Association 88,491,618 6.50 12/01/2008-7/01/2026 85,886,042
Mortgage-Backed Securities 81,120,828 7.00 6/01/2007-5/01/2026 80,877,238
274,438,096 7.50 5/01/2024-10/01/2026 277,644,430
47,985,655 8.00 6/01/2006-11/01/2026 49,419,157
73,746,008 8.50 5/01/2010-11/01/2025 76,833,514
33,079,828 8.50(3) 7/15/2023 34,285,753
26,751,528 9.50 3/01/2020 28,900,010
14,911 10.50 9/01/2000 15,913
39,958,978 11.00 2/01/2011-11/01/2020 45,440,551
99,646 11.50 1/01/2015-6/01/2015 114,001
2,024,853 13.00 8/01/2010-6/01/2015 2,413,362
Federal National Mortgage 93-123-S 15,529,411 8.75468++ 7/25/2000 15,286,764
Association REMICs** 94-M1-IO 79,340,549 0.87000(1)+++ 10/25/2003 3,353,378
94-M4-A 23,680,114 9.03498+++ 8/25/2026 24,690,219
Government National Mortgage Association 10,711,000 6.50 1/15/2026-6/15/2026 10,413,020
Mortgage-Backed Securities 90,243,431 7.00 4/15/2023-12/15/2025 89,708,301
242,607,713 7.50 1/15/2007-9/15/2026 246,284,487
182,525,481 8.00 5/15/2023-9/15/2026 188,394,398
19,916,608 8.50 6/15/2021-3/15/2026 20,800,308
59,156,312 10.00 12/15/2015-12/15/2021 65,237,923
316,222 10.50 10/15/2014-4/15/2021 354,759
868 11.00 1/15/2016 991
11,441 11.50 8/15/2013-4/15/2015 13,261
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,852,705,756) 1,879,894,533
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Amount Issue Value
Repurchase Agreements***--3.82%
<S> <S> <C>
$ 80,000,000 Nikko Securities Co., purchased on 11/27/1996 to yield 5.40%
to 12/03/1996 $ 80,000,000
Total Repurchase Agreements (Cost--$80,000,000) 80,000,000
US Government & Agency Discount Obligations****--4.38%
40,000,000 Federal Home Loan Bank, 5.20% due 12/16/1996 39,919,111
52,000,000 Federal Home Loan Mortgage Corporation, 5.21% due 12/11/1996 51,932,270
Total US Government & Agency Discount Obligations (Cost--$91,851,381) 91,851,381
<CAPTION>
Nominal Value Strike
Covered by Options Price
Options Purchased--0.10%
<S> <C> <S> <C> <S> <C>
Call Options $152,732,135 Federal Home Loan Mortgage Corporation--
Purchased Gold Program, 15-year, 7% 100 November 1996(4) 2,163,023
99,578,723 Government National Mortgage Association,
30-Year, 6% Adjustable Rate Mortgage(6) 100 9/20/2011(5) 24,895
Total Options Purchased (Cost--$3,080,777) 2,187,918
Total Investment (Cost--$2,158,972,474)--104.37% 2,187,215,082
Options Written--0.00%
Put Options 99,578,723 Government National Mortgage Association,
Written 30-Year, 6% Adjustable Rate Mortgage(6) 100 9/20/2011(5) (139,410)
Total Options Written (Premium Received--$0) (139,410)
Total Investments, Net of Options Written (Cost--$2,158,972,474)--104.37% 2,187,075,672
Liabilities in Excess of Other Assets--(4.37%) (91,520,017)
--------------
Net Assets--100.00% $2,095,555,655
==============
Net Asset Class A--Based on net assets of $240,028,291 and 24,799,534
Value: shares of beneficial interest outstanding $ 9.68
==============
Class B--Based on net assets of $865,426,458 and 89,440,755
shares of beneficial interest outstanding $ 9.68
==============
Class C--Based on net assets of $24,714,113 and 2,554,173
shares of beneficial interest outstanding $ 9.68
==============
Class D--Based on net assets of $965,386,793 and 99,775,492
shares of beneficial interest outstanding $ 9.68
==============
<PAGE>
<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.
(4)The option is callable from this date.
(5)Represents European style options which can be exercised only on
the expiration date. These options, when combined, represent a
standby purchase commitment whereby the Trust is obligated to
purchase the outstanding principal amount of specific GNMA 30-year,
6% Adjustable Rate Mortgage pools as of September 20, 2011. For this
commitment, the Trust receives a net .12% per annum based on the
nominal value covered by the options.
(6)Adjustable Rate Security. The interest rate resets annually at
the one-year CMT rate plus 1.5%, subject to a 1% annual adjustment
cap and an 11% life cap.
(7)Represents balloon mortgages that amortize on a 30-year schedule
and have seven-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, 1996.
+++Underlying multi-family loans have prepayment protection by means
of lockout periods and/or yield maintenance premiums.
*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>
