MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
May 31, 1997
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
Joseph T. Monagle Jr., 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 ther information herein are as dated and are subject
to change.
Merrill Lynch
Federal Securities Trust
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
<PAGE>
Economic Environment
Federal Reserve Board (FRB) Chairman Alan Greenspan has indicated
that the acceptable, or non-inflationary, level of economic growth
is in the range of 2%--2.5%. With first-quarter 1997 gross domestic
product (GDP) reported at 5.8%, three of the last four quarters were
substantially above the targeted range. Although recent economic
data indicates more moderate growth for the second quarter, it seems
inevitable that economic growth for 1997 will end at the upper range
of the band.
GDP growth is largely contingent on consumer spending, and real
consumer spending rose 6.4% in the first quarter of 1997, the
fastest pace in nine years. By comparison, consumer spending in 1996
was 2.6%. Behind consumer spending is the rise in consumer
confidence to the highest level since 1969. In turn this reflects
the lowest unemployment rate (4.8%) in nearly 24 years, and the
unprecedented strength of the stock market which continues to set
new record highs.
Interestingly, the environment described above has not yet led to a
period of inflation. Inflation is at a 31-year low. Despite a tight
labor market the employment cost index rose just 0.6% in the first
quarter of 1997 and is up just 2.9% from one year ago. This is near
the slowest compensation growth rate in 50 years. Similarly, the
Consumer Price Index and the Producer Price Index rose just 2.5% and
0.1%, respectively, for the past 12 months.
Strong economic growth with no inflation is the best of both worlds.
Although we may be on the threshold of a new paradigm regarding the
level of non-inflationary growth, there are risks ahead that could
trigger inflation. The FRB must keep a vigilant eye on aggregate
consumer demand and the tight labor markets, which could lead to
demand pull or cost push inflation. So far, the FRB seems committed
to keeping the current economic expansion going, which is now in its
seventh year, while maintaining a tough posture on inflation.
Portfolio Matters
For the quarter ended May 31, 1997, interest rates were relatively
unchanged. All across the maturity curve, from one year to 30 years,
interest rates moved incrementally higher by between 10 basis points
(0.10%) and 15 basis points. The only part of the yield curve that
saw a significant change was at the very short end. Three-month
Treasury bill yields declined by 36 basis points for the May period,
reflecting the fact that the FRB left short-term interest rates
unchanged at its May meeting. Analysts expected that the FRB would
tighten monetary policy by 25 basis points.
If inflation is held in check, current real interest rates (nominal
interest rates adjusted for inflation) are very attractive on a
historical basis. In addition, mortgage-backed securities (MBS)
thrive in a low interest rate volatility environment. Prepayment
concerns are reduced, and investors are willing to pay a higher
price for MBS as the value of the inherent call option is
diminished.
<PAGE>
With attractive real interest rates, we extended the average life of
the portfolio out to 6.5 years. This was accomplished by shifting
into low-coupon, discount-priced MBS where the homeowner does not
have a refinancing incentive. Also, the purchase of longer-term
multi-family MBS added to the average life.
Our portfolio structure also reflects a bias toward high-quality,
high-yielding MBS as 95% of the portfolio is in MBS with the
remaining 5% split between Treasury notes and net short-term
securities. Within the MBS allocation, 19% is invested in 15-year
mortgages which will perform well should interest rate volatility
increase. In addition, 13% is in multi-family securities that have
prepayment protection through contractual restrictions on pre-
payments such as lockouts and yield maintenance penalties. This
provides the portfolio with some protection from unwanted
prepayments should interest rates decline.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
June 23, 1997
PERFORMANCE DATA
<PAGE>
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. However, in the case of certain
eligible investors, the shares 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. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the payable date. 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.
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/97 2/28/97 5/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.53 $9.56 $9.41 +1.28% -0.31%
Class B Shares* 9.53 9.56 9.40 +1.38 -0.31
Class C Shares* 9.53 9.56 9.40 +1.38 -0.31
Class D Shares* 9.53 9.56 9.40 +1.38 -0.31
Class A Shares--Total Return* +8.33(1) +1.36(2)
Class B Shares--Total Return* +7.62(3) +1.17(4)
Class C Shares--Total Return* +7.57(5) +1.16(6)
Class D Shares--Total Return* +8.18(7) +1.30(8)
Class A Shares--Standardized 30-day Yield 5.70%
Class B Shares--Standardized 30-day Yield 5.17%
Class C Shares--Standardized 30-day Yield 5.13%
Class D Shares--Standardized 30-day Yield 5.46%
<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 $0.642 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.160 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.569 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.142 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.565 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.141 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.618 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.154 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
1996 9.78 9.58 -- 0.638 + 4.71
1/1/97--5/31/97 9.58 9.53 -- 0.258 + 2.30
------
Total $1.690
<PAGE>
Cumulative total return as of 5/31/97: +24.35%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1995 9.08 9.77 -- 0.592 +14.47
1996 9.77 9.58 -- 0.565 + 4.02
1/1/97--5/31/97 9.58 9.53 -- 0.229 + 1.98
------
Total $3.028
Cumulative total return as of 5/31/97: +31.52%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1996 9.77 9.58 -- 0.560 + 3.97
1/1/97--5/31/97 9.58 9.53 -- 0.227 + 1.96
------
Total $1.488
Cumulative total return as of 5/31/97: +21.74%**
<PAGE>
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1995 9.08 9.77 -- 0.641 +15.06
1996 9.77 9.58 -- 0.614 + 4.56
1/1/97--5/31/97 9.58 9.53 -- 0.248 + 2.19
------ ------
Total $0.848 Total $9.543
Cumulative total return as of 5/31/97: +199.94%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/97 +5.06% +0.86%
Inception (10/21/94)
through 3/31/97 +8.22 +6.42
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
<PAGE>
Year Ended 3/31/97 +4.26% +0.33%
Five Years Ended 3/31/97 +5.26% +5.26%
Inception (12/23/91)
through 3/31/97 +4.86 +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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/97 +4.32% +3.34%
Inception (10/21/94)
through 3/31/97 +7.34 +7.34
[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 3/31/97 +4.80% +0.61%
Five Years Ended 3/31/97 +5.81 +4.95
Ten Years Ended 3/31/97 +7.34 +6.91
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C>
US Government Obligations--1.78%
United States Treasury Notes $ 30,000,000 6.50 % 10/15/2006 $ 29,634,300
5,000,000 6.625 5/15/2007 4,985,150
Total US Government Obligations (Cost--$34,912,500) 34,619,450
US Government Agency Mortgage-Backed Obligations*--94.84%
Federal Home Loan Mortgage 100,000,000 6.775(7) 11/01/2003 99,281,250
Corporation--Multi-Family+++ 9,815,999 7.225(2) 11/01/1997 9,786,858
Federal Home Loan Mortgage Corporation 606 10.00 7/01/2019 663
Participation Certificates 15,607,223 10.50 9/01/2000-9/01/2020 17,172,784
3,741,904 11.00 8/01/2010-9/01/2020 4,165,189
3,127,169 11.50 10/01/1998-6/01/2020 3,517,064
1,467,587 12.00 7/01/1999-6/01/2020 1,675,339
3,125,770 12.50 10/01/1999-7/01/2019 3,618,079
4,283,619 13.00 8/01/1999-2/01/2016 5,015,818
Federal Home Loan Mortgage Corporation 392,525 6.00 4/01/2009 378,787
Participation Certificates--Gold Program 147,026,906 6.50 15-Year TBA (8) 143,487,968
49,500,220 6.50(7) 9/01/2003-6/01/2004 48,738,362
123,225,731 7.00 8/01/2011-5/01/2012 122,573,004
22,900,872 7.00(2) 10/01/1999 23,051,560
34,313,974 7.50 5/01/2009-9/01/2026 34,696,773
66,143,833 8.00 1/01/2007-11/01/2025 67,618,967
12,421,866 8.50 1/01/2025-7/01/2025 12,864,333
5,406,562 10.50 10/01/2020-12/01/2020 5,950,571
Federal Home Loan Mortgage Trust 273 6,917,430 7.00(1) 7/01/2026 2,521,300
Corporation REMICs** Trust 134 2,092,309 9.00(1) 4/15/2022 585,177
Trust 1220 10,492,418 10.00 2/15/2022 10,684,844
<PAGE>
Federal National Mortgage Association 66,918,199 6.50 12/01/2008-5/01/2026 63,535,410
Mortgage-Backed Securities 102,406,398 7.00 6/01/2007-12/01/2026 100,245,164
172,552,673 7.50 1/01/2025-1/01/2027 171,899,051
45,814,026 8.00 6/01/2006-1/01/2027 46,706,139
67,212,857 8.50 5/01/2010-11/01/2025 69,497,483
29,978,484 8.50(3) 7/15/2023 30,906,738
23,374,847 9.50 3/01/2020 25,069,523
13,144 10.50 9/01/2000 14,081
35,498,299 11.00 2/01/2011-11/01/2020 39,758,085
98,430 11.50 1/01/2015-6/01/2015 111,041
1,826,037 13.00 8/01/2010-6/01/2015 2,140,444
Federal National Mortgage Association #0073894 996,228 6.525 12/01/2003 973,813
Mortgage-Backed Securities-- #0073885 897,303 6.545 1/01/2007 865,337
Multi-Family+++ #0073873 773,291 6.625 2/01/2007 749,851
#0073221 1,478,506 6.715 10/01/2005 1,451,246
#0375015 19,727,987 6.79 4/01/2004 19,573,863
#0073915 1,548,205 6.87 1/01/2007 1,526,434
#0073910 11,907,304 6.875 1/01/2007 11,550,085
#0375043 3,597,570 6.895 4/01/2007 3,553,724
#0375007 12,167,645 6.94 3/01/2007 12,038,364
#0375012 3,297,797 6.95 4/01/2007 3,268,941
#0073944 13,951,848 6.96 1/01/2007 13,825,410
#0073952 2,837,517 6.96 2/01/2007 2,812,245
</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 National Mortgage Association #0073946 $ 5,484,436 6.97 % 2/01/2007 $ 5,438,161
Mortgage-Backed Securities-- #0073969 8,148,059 7.05 2/01/2007 8,122,597
Multi-Family+++ #0073962 4,720,721 7.085 2/01/2007 4,717,033
(concluded) #0073967 4,590,791 7.105 3/01/2007 4,599,399
#0073992 2,607,306 7.115 2/01/2007 2,613,825
#0375069 1,098,858 7.122 3/01/2007 1,101,948
#0073943 1,493,900 7.18 2/01/2019 1,469,624
#0073608 4,872,874 7.49 8/01/2006 5,014,492
#0375052 4,762,064 7.50 3/01/2007 4,741,230
#0109076 2,205,076 7.59 8/01/2006 2,274,330
Federal National Mortgage Association 94-M1-IO 78,779,535 0.87(1) 10/25/2003 3,108,099
Mortgage-Backed Securities-- 94-M4-A 21,220,329 9.04907 8/25/2026 21,963,041
REMICs**--Multi-Family+++ 96-M3-AZ 10,500,000 7.41 3/25/2021 10,657,500
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,947,929
REMICs** 93-123-S 15,529,411 7.73906++ 7/25/2000 14,825,735
<PAGE>
Government National Mortgage Association 50,196,568 7.00 4/15/2023-12/15/2025 48,834,300
Mortgage-Backed Securities 231,189,706 7.50 1/15/2007-5/15/2026 230,496,561
176,902,291 8.00 5/15/2023-9/15/2026 180,084,006
52,857,044 10.00 12/15/2015-12/15/2021 57,779,470
280,942 10.50 10/15/2014-4/15/2021 311,143
860 11.00 1/15/2016 969
6,560 11.50 8/15/2013 7,474
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,849,988,836) 1,849,566,028
<CAPTION>
Face Amount Issue
Repurchase Agreements***--1.80%
<C> <S> <C>
$ 35,000,000 Nikko Securities Co., purchased on 5/30/1997 to yield 5.58% to 6/02/1997 35,000,000
Total Repurchase Agreements (Cost--$35,000,000) 35,000,000
US Government & Agency Discount Obligations****--22.30%
55,000,000 Federal Home Loan Banks, 5.47% due 6/17/1997 54,874,646
91,750,000 Federal Home Loan Mortgage Corporation, 5.49% due 6/19/1997 91,512,138
Federal National Mortgage Association:
200,000,000 5.40% due 6/12/1997 199,700,000
89,000,000 5.42% due 6/17/1997 88,799,008
Total US Government & Agency Discount Obligations (Cost--$434,885,792) 434,885,792
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Notification
Covered by Options Price Date Value
<S> <C> <S> <C> <C> <C>
Options Purchased--0.06%
Call Options $144,470,488 Federal Home Loan Mortgage
Purchased Corporation--Gold Program,
15-year, 7% 100 5/1997(4) $ 1,193,792
98,144,987 Government National Mortgage
Association, 30-Year, 6%
Adjustable Rate Mortgage(6) 100 9/20/2011(5) 29,444
Total Options Purchased (Cost--$2,914,426) 1,223,236
Total Investments (Cost--$2,357,701,554)--120.78% 2,355,294,506
<PAGE>
Options Written--(0.01)%
Put Options 98,144,987 Government National Mortgage
Written Association, 30-Year, 6%
Adjustable Rate Mortgage(6) 100 9/20/2011(5) (137,403)
Total Options Written (Premiums Received--$0) (137,403)
Total Investments, Net of Options Written (Cost--$2,357,701,554)--120.77% 2,355,157,103
Liabilities in Excess of Other Assets--(20.77%) (405,020,172)
--------------
Net Assets--100.00% $1,950,136,931
==============
Net Asset Class A--Based on net assets of $275,179,095 and 28,879,596 shares
Value: of beneficial interest outstanding $ 9.53
==============
Class B--Based on net assets of $708,559,514 and 74,382,667 shares of
beneficial interest outstanding $ 9.53
==============
Class C--Based on net assets of $28,841,425 and 3,027,805 shares of
beneficial interest outstanding $ 9.53
==============
Class D--Based on net assets of $937,556,897 and 98,427,064 shares of
beneficial interest outstanding $ 9.53
==============
<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 0.12% per annum based on the
nominal value covered by the options.
(6)Adjustable Rate Security. The interest rate resets annually at
the 1-year Constant Maturing Treasury rate plus 1.5%, subject to a
1% annual adjustment cap and an 11% life cap.
<PAGE>
(7)Represents balloon mortgages that amortize on a 30-year schedule
and have 7-year maturities.
(8)Represents a "to-be-announced" (TBA) transaction. The Trust has
committed to purchasing securities for which all specific
information is not available at this time.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
May 31, 1997.
+++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>
