MERRILL LYNCH
FEDERAL
SECURITIES TRUST
[FUND LOGO]
STRATEGIC
Performance
Quarterly Report
November 30, 1997
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 #10280 -- 11/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy continued to exhibit moderately strong growth during
the three months ended November 30, 1997. Led by a surge in consumer
spending, gross domestic product (GDP) rose 3.3% during the third
quarter of 1997. Nonetheless, inflationary pressures remained benign.
As a result, investors reacted positively to the reports of low
inflation by pushing interest rates lower.
Consumer demand increased sharply during the November quarter. After
rising just 0.9% in the second quarter of 1997, consumer spending rose
5.8% in the third quarter, the fastest pace in five years. In
addition, falling mortgage rates and consumer exuberance continued to
support the real estate market. Existing home sales rose to an all-
time high of 4.4 million units in October, the third consecutive
record-breaking month. The US labor market, showing no signs of
slackening, remained remarkably strong. Job growth surged by 404,000
in November, the largest gain in 18 months. Consequently, the
unemployment rate fell to 4.6%, a new 24-year low. Nevertheless,
despite the recent economic performance, there are indications growth
may be tempered in the upcoming months. Although consumer spending
jumped in the third quarter, preliminary data indicate spending is
moderating as retail sales fell in both September and October.
Moreover, the Asian financial crisis, which sent shock waves
throughout the global equity markets, could dampen export growth,
since nearly 30% of all US exports are to the Asian region. Finally,
the recent flattening of the US Treasury yield curve, a sensitive
indicator of future economic growth, suggests growth could moderate in
1998. At the close of November, the US Treasury yield curve narrowed
to 85 basis points (0.85%) between three-month Treasury bills and 30-
year Treasury bonds. The last time the yield curve was this narrow,
GDP growth slowed to around 2% in the following year.
Continued low inflation has allowed the Federal Reserve Board (FRB) to
refrain from adjusting monetary policy despite stronger-than-
anticipated economic growth. Both the Producer Price Index (PPI) and
the Consumer Price Index (CPI) remain at, or near, 30-year lows.
Through October, the PPI and CPI rose just 0.3% and 2.3%,
respectively, over the past year. Furthermore, gold and industrial
prices continued to decline. Gold fell to a 13-year low in November,
while the Journal of Commerce Industrial Price index, a broad measure
of commodity prices, fell to a 3.5-year low. More important, the
underlying fundamentals remain extremely positive for continued low
inflation into 1998. Production bottleneck pressures are absent, while
unit labor costs are declining because of gains in productivity and
capital spending. In addition, the devaluation of several Asian
currencies should limit advances in import prices.
While an interest rate hike by the FRB remains a possibility as a
result of the unprecedented strength of the US economy, we believe
changes in monetary policy will remain on hold in the near term. The
turmoil in the Asian markets coupled with the lack of domestic
inflationary pressures should allow the FRB an extended time window in
compiling additional data to determine the future growth prospects of
the US economy. In any event, since rising interest rates erode fixed-
income prices, we remain vigilant toward the prospect of a tightening
by the FRB in the near term.
Portfolio Strategy
During the quarter ended November 30, 1997, the portfolio's structure
and our strategy centered on prepayment concerns and the
extraordinarily flat yield curve. Prepayment concerns resurfaced
because long-term interest rates have fallen to around 6%. Homeowners,
eager to reduce their monthly mortgage payments, are again gearing
up to refinance at the lower interest rates. Contributing
significantly to refinancing activity is the increased computer
sophistication of the mortgage banking industry, which contributes to
both solicitation efforts and cost efficiencies. Also, the competition
between lenders to get excess investment cash into the market and
build a servicing portfolio has led to lower closing costs.
We are seeking to protect the Trust against a spike in refinancing-
driven prepayments in three ways. In a broad sense we invested in
issues with lower coupons so there is not as much of a refinancing
incentive. Many of these securities are at discount prices where
prepayment (for reasons other than refinancing) actually add to the
security's yield. We also added to our Treasury position, where there
are no prepayments, and to our Treasury surrogate positions, such as
Federal National Mortgage Association multi-family loans, where we
would collect a yield maintenance prepayment penalty should the
property be sold or refinanced. Finally, for the higher-couponed
mortgage-backed securities (MBS) in the portfolio, we focused on
older, seasoned mortgages where the homeowners failed to act on
previous refinancing incentives. Also, these mortgages are old enough
to not be on a mortgage banker's recent listing for solicitation of
refinancing.
The yield curve is extraordinarily flat as illustrated by the 10 basis
point (0.10%) spread between two-year Treasury notes -- ten-year
Treasury notes. While there is little reward in yield for extending
out the maturity curve, the anomaly of such a flat curve presents many
opportunities. First, the portfolio's structure has shifted to
Treasury and agency multi-family securities with bullet maturities
(those with a single maturation date). These issues are more
attractive than amortizing securities because they are likely to
outperform when the yield curve steepens. This is because they have
the potential to roll down the yield curve (that is, appreciate over
time with no change in interest rates). Second, intermediate-term MBS
should also perform better when the curve steepens. As such, we
increased the portfolio's allocation to 15-year mortgages relative to
their 30-year counterparts.
In Conclusion
We thank you for your continued investment in Merrill Lynch Federal
Securities Trust, and we look forward to discussing our outlook and
strategy with you in our upcoming semi-annual report to shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/GREGORY MARK MAUNZ
Gregory Mark Maunz
Vice President and Portfolio Manager
January 8, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Trust through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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.
[bullet] 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.)
[bullet] 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.
[bullet] 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.
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
11/30/97 8/31/97 11/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.72 $9.64 $9.68 +0.41% +0.83%
Class B Shares* 9.72 9.63 9.68 +0.41 +0.93
Class C Shares* 9.71 9.63 9.68 +0.31 +0.83
Class D Shares* 9.71 9.63 9.68 +0.31 +0.83
Class A Shares -- Total Return* +7.27(1) +2.44(2)
Class B Shares -- Total Return* +6.45(3) +2.35(4)
Class C Shares -- Total Return* +6.29(5) +2.24(6)
Class D Shares -- Total Return* +6.89(7) +2.38(8)
Class A Shares -- Standardized 30-day Yield 6.04%
Class B Shares -- Standardized 30-day Yield 5.52%
Class C Shares -- Standardized 30-day Yield 5.48%
Class D Shares -- Standardized 30-day Yield 5.81%
* 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 $0.637 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.156 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.563 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.138 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.558 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.136 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.612 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.150 per share ordinary income dividends.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/97 +9.51% +5.13%
Inception (10/21/94)
through 9/30/97 +9.18 +7.68
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/97 +8.57% +4.57%
Five Years Ended 9/30/97 +5.27 +5.27
Inception (12/23/91)
through 9/30/97 +5.54 +5.54
* 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 9/30/97 +8.51% +7.52%
Inception (10/21/94)
through 9/30/97 +8.26 +8.26
* 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 9/30/97 +9.13% +4.76%
Five Years Ended 9/30/97 +5.81 +4.95
Ten Years Ended 9/30/97 +8.53 +8.09
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
OFFICERS AND DIRECTORS
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
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
<TABLE>
<CAPTION>
Merrill Lynch Federal Securities Trust November 30, 1997
SCHEDULE OF INVESTMENTS
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C> <C>
US Government Obligations -- 8.95%
United States Treasury Notes $50,000,000 5.75 % 11/15/2000 $49,929,500
25,000,000 5.75 10/31/2002 24,894,500
30,000,000 5.875 9/30/2002 30,018,600
19,000,000 6.00 8/15/2000 19,089,110
40,000,000 6.25 8/31/2002 40,624,800
5,000,000 6.625 5/15/2007 5,258,600
-------------
Total US Government Obligations (Cost -- $169,674,766) 169,815,110
=============
US Government Agency Mortgage-Backed Obligations* -- 87.40%
Federal Home Loan Mortgage 100,000,000 6.775(7) 11/01/2003 102,203,125
Corporation -- Multi-Family++
Federal Home Loan Mortgage Corporation 594 10.00 7/01/2019 651
Participation Certificates 13,762,625 10.50 9/01/2000-9/01/2020 15,375,330
3,178,640 11.00 8/01/2010-9/01/2020 3,589,860
2,917,436 11.50 10/01/1998-6/01/2020 3,327,685
1,345,474 12.00 7/01/1999-6/01/2020 1,556,955
2,618,148 12.50 10/01/1999-7/01/2019 3,073,052
3,745,700 13.00 8/01/1999-2/01/2016 4,450,341
Federal Home Loan Mortgage Corporation 367,039 6.00 4/01/2009 362,781
Participation Certificates -- Gold Program 146,115,895 6.50 2/01/2012-10/01/2012 145,703,848
49,025,522 6.50(7) 10/01/2003-12/01/2004 49,040,805
144,466,391 7.00 6/01/2011-11/01/2012 146,291,452
19,179,037 7.00(2) 10/01/1999 19,409,570
32,330,031 7.50 5/01/2009-9/01/2026 33,118,103
31,716,170 8.00 1/01/2007-10/01/2027 32,792,476
11,350,272 8.50 1/01/2025-7/01/2025 11,843,214
4,773,337 10.50 10/01/2020-12/01/2020 5,292,438
Federal Home Loan Mortgage Trust 273 6,665,287 7.00(1) 7/01/2026 2,006,765
Corporation REMICs** Trust 134 1,901,480 9.00(1) 4/15/2022 496,762
Trust 1220 9,188,222 10.00 2/15/2022 9,419,243
Federal National Mortgage Association 118,779,456 6.50 12/01/2008-5/01/2026 117,717,650
Mortgage-Backed Securities 88,675,723 7.00 10/01/2012-12/01/2026 89,691,460
9,984,664 7.50 1/01/2025-11/01/2026 10,197,765
1,270,715 8.00 10/01/2026-9/01/2027 1,314,420
60,287,472 8.50 5/01/2010-11/01/2025 62,949,237
27,312,664 8.50(3) 7/15/2023 28,448,706
19,577,139 9.50 3/01/2020 20,984,246
11,318 10.50 9/01/2000 12,142
30,838,513 11.00 2/01/2011-11/01/2020 35,194,453
97,120 11.50 1/01/2015-6/01/2015 111,475
1,646,820 13.00 8/01/2010-6/01/2015 1,975,146
Federal National Mortgage Association #0375610 14,000,000 6.465(10) 6/01/2004 14,017,500
Mortgage-Backed Securities -- Multi-Family++ #0380021 6,400,000 6.467(2) 1/01/2008 6,408,000
#0073894 991,543 6.525(7) 12/01/2003 997,741
#0073885 893,130 6.545(9) 1/01/2007 896,479
#0073873 769,775 6.625(9) 2/01/2007 776,992
#0073221 1,471,157 6.715(7) 10/01/2005 1,491,845
#0375015 19,592,939 6.79(7) 4/01/2004 19,978,675
#0073915 1,537,676 6.87(9) 1/01/2007 1,575,157
#0073910 11,856,613 6.875(9) 1/01/2007 12,264,184
#0375043 3,582,645 6.895(9) 4/01/2007 3,681,168
#0375007 12,117,253 6.94(9) 3/01/2007 12,446,690
#0375012 3,284,266 6.95(9) 4/01/2007 3,385,873
#0073944 13,901,543 6.96(9) 1/01/2007 14,335,966
#0073952 2,818,174 6.96(9) 2/01/2007 2,906,242
#0073946 5,452,408 6.97(9) 2/01/2007 5,622,796
#0073969 8,092,587 7.05(9) 2/01/2007 8,385,943
#0073962 4,701,587 7.085(9) 2/01/2007 4,883,774
#0073967 4,571,809 7.105(9) 3/01/2007 4,744,681
#0073992 2,596,802 7.115(9) 2/01/2007 2,696,616
#0375069 1,091,841 7.122(9) 3/01/2007 1,134,491
#0073943 1,481,317 7.18(10) 2/01/2019 1,561,864
#0073608 4,853,801 7.49(9) 8/01/2006 5,149,579
#0375052 4,744,010 7.50(8) 3/01/2007 4,970,833
#0109076 2,192,190 7.59(9) 8/01/2006 2,326,462
#0160024 5,878,419 7.625(9) 11/01/2003 6,073,141
#0160095 7,241,505 7.66(9) 3/01/2004 7,551,532
Federal National Mortgage Association 94-M1-IO 75,979,443 0.87(1) 10/25/2003 2,849,229
Mortgage-Backed Securities -- REMICs** -- 97-M8-A2 17,000,000 7.16 1/25/2022 17,382,500
Multi-Family++ 96-M3-A2 10,500,000 7.41 3/25/2021 10,946,250
94-M4-A 18,931,732 9.06011 8/25/2026 19,807,325
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,849,284
REMICs** 93-123-S 15,529,411 7.94218+ 7/25/2000 15,611,872
Government National Mortgage Association 49,942,867 7.00 4/15/2022-11/15/2027 50,085,978
Mortgage-Backed Securities 255,429,979 7.50 1/15/2007-11/15/2027 260,684,733
115,180,062 8.00 5/15/2023-9/15/2026 119,232,708
45,866,490 10.00 12/15/2015-12/15/2021 51,129,234
161,016 10.50 10/15/2014-4/15/2021 182,048
763 11.00 1/15/2016 879
6,491 11.50 8/15/2013 7,566
-------------
Total US Government Agency Mortgage-Backed Obligations (Cost -- $1,635,739,794) 1,657,984,986
=============
<CAPTION>
Face
Amount Issue
Repurchase Agreements*** -- 4.09%
<S> <C> <C>
$77,605,000 Nikko Securities Co., purchased on 11/28/1997 to yield 5.75% to 12/01/1997 77,605,000
-------------
Total Repurchase Agreements (Cost -- $77,605,000) 77,605,000
=============
<CAPTION>
Nominal Value Strike Notification
Covered by Options Price Date
Options Purchased -- 0.10%
<S> <C> <C> <C> <C> <C>
Call Options 133,290,682 Federal Home Loan Mortgage Corporation --
Purchased Gold Program, 15-year, 7% 100 11/1997(4) 1,781,384
90,802,150 Government National Mortgage Association,
30-Year, 7% Adjustable Rate Mortgage(6) 100 9/20/2011(5) 27,241
--------------
Total Options Purchased (Cost -- $2,689,462) 1,808,625
==============
Total Investments (Cost -- $1,885,709,022) -- 100.54% 1,907,213,721
==============
<CAPTION>
Nominal Value Strike Notification
Covered by Options Issue Price Date Value
Options Written -- (0.01%)
<S> <C> <C> <C> <C> <C>
Put Options 90,802,150 Government National Mortgage Association,
Written 30-Year, 7% Adjustable Rate Mortgage(6) 100 9/20/2011(5) $(127,123)
--------------
Total Options Written (Premiums Received -- $0) (127,123)
==============
Total Investments, Net of Options Written (Cost -- $1,885,709,022) -- 100.53% 1,907,086,598
Liabilities in Excess of Other Assets -- (0.53%) (10,136,158)
--------------
Net Assets -- 100.00% $1,896,950,440
==============
Net Asset Class A -- Based on net assets of $288,698,763 and 29,707,769 shares of beneficial
Value: interest outstanding $9.72
==============
Class B -- Based on net assets of $651,220,527 and 67,031,199 shares of beneficial
interest outstanding $9.72
==============
Class C -- Based on net assets of $28,216,157 and 2,904,435 shares of beneficial
interest outstanding $9.71
==============
Class D -- Based on net assets of $928,814,993 and 95,609,563 shares of beneficial
interest outstanding $9.71
==============
(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, 7% 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.
(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.
(9) Represents balloon mortgages that amortize on a 25-year or 30-year
schedule and have 10-year maturities.
(10) Represents balloon mortgages that amortize on a 22-year schedule and
have 22-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, 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.
</TABLE>
