MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
May 31, 1998
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
Printed on post-consumer recycled paper
MERRILL LYNCH FEDERAL SECURITIES TRUST
DEAR SHAREHOLDER
Economic Environment
The US economy continued to expand at an above-trend pace for the
three months ended May 31, 1998. Despite declining export growth and
a relatively high real interest rate environment, gross domestic
product (GDP) rose 5.4% in the first quarter of 1998, marking the
sixth consecutive quarter that the annualized growth rate of GDP has
exceeded 3.0%. Consumer spending, which has more than offset the
trade drag resulting from the Asian economic crisis, rose 6.1% in
the first quarter and has been largely responsible for the strong
showing of the US economy. Nonetheless, despite continued overall
economic strength, the Federal Reserve Board refrained from raising
interest rates during the May quarter.
Two fundamental catalysts contributing to the surge in consumer
spending have been the strength of the job market and the strength
of the US equity market. With an average gain of 245,000 new jobs
per month through the first five months of 1998, employment growth
in the United States remains strong. As a result, the unemployment
rate has fallen to a 28-year low of 4.3%. More important, labor
costs continue to trend upward. Average hourly earnings rose 4.3%
over the 12 months ended May 31, 1998, the highest year-over-year
pace in the current economic expansion and well above the current
rate of inflation. Consumer spending has also been influenced by the
strength of the US stock market. In the three years since December
1994, the overall net wealth of US households has risen 38% in
response to the climb of equity prices. As a result, US households
are spending more and saving less of their personal income, while
still seeing their overall net wealth increase.
The strength of consumer demand has carried over to other sectors of
the economy as well. Reflecting a confluence of favorable factors
(low mortgage rates, strong income growth and high consumer
confidence), housing remains exceptionally strong. New housing
starts rose to an annualized 1.58 million-unit rate in the first
quarter of 1998, the fastest pace in ten years. In addition, both
new and existing home sales are currently at or near record levels.
Despite rising wage growth and strong domestic demand, the lack of
corporate pricing power has kept inflation subdued. During the 12-
month period ended May 31, 1998, the consumer price index rose just
1.7%, while the producer price index fell 1.2%.
Although the Asian currency crisis is likely to continue to hamper
export growth and act as a drag on GDP, we do not expect consumer
spending to slow significantly in the second half of 1998, barring a
major stock market correction. Since domestic demand accounts for
nearly two-thirds of GDP, we expect economic growth to remain
moderately strong throughout 1998. Meanwhile, should labor markets
tighten further, the current benign inflationary environment could
be threatened by escalating wage pressures. Consequently, we believe
that the risk of a tightening in monetary policy by the Federal
Reserve Board has increased and that interest rates could rise in
the near term.
Portfolio Matters
Interest rates remained essentially unchanged during the May
quarter. The exception was the 30-year Treasury bond, which declined
12 basis points (0.12%) to end the quarter at 5.80%. During periods
of interest rate stability, mortgage-backed securities (MBS) tend to
perform well. The incremental yield of MBS is obtained without a
change in prepayment expectations that might adversely affect price.
During the May quarter, while most Treasury prices were relatively
unchanged, MBS prices increased slightly as investors' fears of
prepayments diminished.
We continue to focus on MBS, with 85% of the Trust's net assets in
MBS and the remaining 15% in Treasury notes and short-term
securities. Although prepayment fears have diminished, the portfolio
remains structured to avoid those MBS with the most prepayment
uncertainty and risk. The technological sophistication of mortgage
bankers has led to an easing of the refinancing process such that it
will always be a major investment consideration. In the MBS portion
of the portfolio, our focus is on low-coupon MBS where there is
currently no refinancing incentive and on Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
multi-family MBS where there are prepayment penalties for principal
paydowns. For higher coupon MBS, the focus is on "super-seasoned"
mortgages where the homeowner has not acted on any of the
refinancing opportunities of the past six years or on low balance
mortgages where refinancing closing costs are disproportionately
high.
Merrill Lynch Federal Securities Trust
May 31, 1998
In the single-family MBS sector, we have been overweighting
Government National Mortgage Association (GNMA), which are Federal
Housing Administration/ Veterans' Administration mortgages, rather
than the conventional mortgage counterparts of FNMA and FHLMC. GNMA
MBS typically have slower prepayments for a given mortgage rate.
Similarly, the portfolio's concentration in 15-year MBS has remained
high as these prepayments tend to be slower compared to similar
duration 30-year MBS.
Real interest rates (adjusted for inflation) remain historically
high; therefore, we continue to be fully invested. MBS yield spreads
are attractive so we continue to favor MBS. Finally, uncertainty at
the front end of the yield curve resulting from Federal Reserve
Board policy and concern at the back end of the yield curve
resulting from economic expansion and its effect on inflation have
led us to favor the middle portion of the yield curve.
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 next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and Portfolio Manager
June 29, 1998
Merrill Lynch Federal Securities Trust
May 31, 1998
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. 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 shareconversions.)
* 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 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>
Recent Performance Results*
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-day Yield
Total Return Total Return Total Return As of 5/31/98
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +9.08% +1.55% + 35.65% 5.65%
ML Federal Securities Trust Class B Shares +8.25 +1.35 + 42.38 5.11
ML Federal Securities Trust Class C Shares +8.20 +1.34 + 31.72 5.06
ML Federal Securities Trust Class D Shares +8.81 +1.48 +118.91 5.41
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. The
Trust's ten-year/inception dates are: Class A and Class C Shares,
10/21/94; Class B Shares, 12/23/91; and Class D Shares, ten years
ended 5/31/98.
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/98 +10.51% +6.09%
Inception (10/21/94)
through 3/31/98 + 8.88 +7.59
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/98 +9.67% +5.67%
Five Years Ended 3/31/98 +5.35 +5.35
Inception (12/23/91)
through 3/31/98 +5.61 +5.61
[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 3/31/98 +9.61% +8.61%
Inception (10/21/94)
through 3/31/98 +8.00 +8.00
[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 3/31/98 +10.23% +5.83%
Five Years Ended 3/31/98 + 5.87 +5.01
Ten Years Ended 3/31/98 + 7.92 +7.48
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
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
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, 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
Merrill Lynch Federal Securities Trust
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
<S> <C> <C> <C> <C>
US Government Obligations--10.81%
United States Treasury Notes $ 69,000,000 5.375% 2/15/2001 $ 68,666,040
25,000,000 5.50 2/28/2003 24,898,500
95,000,000 5.625 12/31/2002 95,074,100
5,000,000 6.625 5/15/2007 5,326,550
Total US Government Obligations (Cost--$193,616,010) 193,965,190
US Government Agency Mortgage-Backed Obligations*--85.33%
Federal Home Loan Mortgage #W10002 100,000,000 6.775(2) 11/01/2003 103,000,010
Corporation Mortgage-Backed Securities--
Multi-Family++++
Federal Home Loan Mortgage Corporation 583 10.00 7/01/2019 633
Participation Certificates 11,879,695 10.50 9/01/2000-9/01/2020 13,338,640
2,813,793 11.00 8/01/2010-9/01/2020 3,193,655
2,500,912 11.50 10/01/1998-6/01/2020 2,865,870
1,154,605 12.00 7/01/1999-6/01/2020 1,342,586
2,290,162 12.50 10/01/1999-7/01/2019 2,700,239
3,299,465 13.00 8/01/1999-1/01/2016 3,937,680
Federal Home Loan Mortgage Corporation 347,063 6.00 4/01/2009 346,230
Participation Certificates--Gold Program 1,863,034 6.50 3/01/2012-2/01/2013 1,876,440
47,788,950 6.50(7) 10/01/2003-12/01/2004 48,220,393
186,859,140 7.00 1/01/2008-2/01/2013 191,194,410
60,821,905 7.50 5/01/2009-9/01/2026(8) 62,606,593
25,637,475 8.00 1/01/2007-10/01/2027 26,502,353
8,200,741 8.50 1/01/2025-7/01/2025 8,572,317
4,305,122 10.50 10/01/2020-12/01/2020 4,761,163
Federal Home Loan Mortgage Trust 1220 7,889,966 10.00 2/15/2022 7,883,989
Corporation REMICs**
Federal National Mortgage Association 259,497,202 6.50 12/01/2008-3/01/2028 260,400,020
28,503,786 7.00 9/01/2027-2/01/2028 28,904,549
48,523 7.50 1/01/2025-8/01/2026 52,550
1,034,409 8.00 9/01/2024-9/01/2027 1,073,934
11,882,457 8.50 5/01/2010-5/01/2018 12,432,302
22,594,989 8.50(3) 7/15/2023 23,654,129
16,769,973 9.50 3/01/2020 17,964,833
8,834 10.50 9/01/2000 9,482
26,077,254 11.00 2/01/2011-11/01/2020 29,646,447
36,010 11.50 6/01/2015 41,187
1,416,848 13.00 8/01/2010-6/01/2015 1,690,470
Federal National Mortgage Association #0375610 13,943,381 6.465(7) 6/01/2004 14,030,527
Mortgage-Backed Securities-- #0380021 6,371,423 6.49(9) 1/01/2008 6,435,138
Multi-Family++++ #0073809 10,545,741 6.515(10) 12/01/2001 10,568,810
#0073894 986,681 6.525(7) 12/01/2003 1,005,490
#0073885 888,797 6.545(9) 1/01/2007 906,295
#0073873 766,124 6.625(9) 2/01/2007 784,319
#0073221 1,463,519 6.715(7) 10/01/2005 1,499,650
#0375015 19,452,649 6.79(7) 4/01/2004 20,042,307
#0073915 1,526,729 6.87(9) 1/01/2007 1,574,439
#0073910 11,803,873 6.875(9) 1/01/2007 11,663,702
#0375043 3,567,116 6.895(9) 4/01/2007 3,714,260
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1998
<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 #0375007 $ 12,064,807 6.94(9) % 3/01/2007 $ 12,622,804
Mortgage-Backed Securities-- #0375012 3,270,183 6.95(9) 4/01/2007 3,399,968
Multi-Family++++ (concluded) #0073944 13,839,285 6.96(9) 1/01/2007 14,384,207
#0073952 2,798,063 6.96(9) 2/01/2007 2,908,237
#0073946 5,419,140 6.97(9) 2/01/2007 5,632,519
#0073969 8,034,925 7.05(9) 2/01/2007 8,301,082
#0073962 4,681,659 7.085(9) 2/01/2007 4,880,630
#0073967 4,552,049 7.105(9) 3/01/2007 4,799,567
#0073992 2,585,859 7.115(9) 2/01/2007 2,726,466
#0375069 1,084,536 7.122(9) 3/01/2007 1,142,830
#0073943 1,468,205 7.18(4) 2/01/2019 1,567,309
#0073608 4,833,896 7.49(9) 8/01/2006 5,170,758
#0375052 4,725,179 7.50(9) 3/01/2007 4,918,616
#0109076 2,178,710 7.59(9) 8/01/2006 2,301,263
#0160024 5,155,301 7.625(9) 11/01/2003 5,332,515
#0160095 7,201,675 7.66(9) 3/01/2004 7,615,771
Federal National Mortgage Association 98-M1-IO2 99,760,111 0.68635(1) 2/25/2013 2,665,145
REMICs**--Multi-Family++++ 97-M8-A2 17,000,000 7.16 1/25/2022 17,478,125
96-M3-AZ 40,500,000 7.41 3/25/2021 42,550,313
94-M3-B 20,513,004 7.71 4/25/2006 20,743,775
94-M4-A 14,113,121 9.06015 8/25/2026 14,774,674
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,704,872
REMICs** Trust 273 6,192,404 7.00(1) 7/01/2026 1,549,587
93-123-S 15,388,547 7.84062++ 7/25/2000 15,508,732
Trust 134 1,670,127 9.00(1) 4/15/2022 387,252
Government National 96,284,708 7.00 4/15/2022-1/15/2028 97,830,928
Mortgage Association 145,317,558 7.50 1/15/2007-4/15/2028(8) 149,826,540
94,848,382 8.00 5/15/2023-9/15/2026 98,707,321
39,598,967 10.00 12/15/2015-12/15/2021 43,772,319
118,822 10.50 10/15/2014-4/15/2021 132,894
557 11.00 1/15/2016 634
6,417 11.50 8/15/2013 7,369
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,514,853,125) 1,530,864,594
Face
Amount Issue
Repurchase Agreements***--3.63%
$ 65,000,000 Nikko Securities Co., purchased on 5/29/1998 to yield 5.60% to 6/01/1998 65,000,000
Total Repurchase Agreements (Cost--$65,000,000) 65,000,000
US Government Agency Discount Obligations****--1.39%
25,000,000 Federal Home Loan Mortgage Corporation, 5.41% due 6/15/1998 24,947,403
Total US Government Agency Discount Obligations (Cost--$24,947,403) 24,947,403
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Notification
Covered by Options Issue Price Date Value
<S> <C> <S> <C> <C> <C>
Options Purchased--0.00%
Call Options 71,525,003 Government National Mortgage
Purchased Association, 30-Year, 7% Adjustable
Rate Mortgage(6) 100 9/20/2011(5) $ 57,220
Total Options Purchased (Cost--$0)(5) 57,220
Total Investments (Cost--$1,798,416,538)--101.16% 1,814,834,407
Options Written--0.00%
Put Options 71,525,003 Government National Mortgage
Written Association,30-Year, 7% Adjustable
Rate Mortgage(6) 100 9/20/2011(5) (50,067)
Total Options Written (Premiums Received--$0)(5) (50,067)
Total Investments, Net of Options Written (Cost--$1,798,416,538)--101.16% 1,814,784,340
Liabilities in Excess of Other Assets--(1.16%) (20,725,830)
--------------
Net Assets--100.00% $1,794,058,510
==============
Net Asset Class A--Based on net assets of $292,420,625 and 29,960,252 shares of beneficial
Value: interest outstanding $ 9.76
==============
Class B--Based on net assets of $591,697,027 and 60,640,543 shares of beneficial
interest outstanding $ 9.76
==============
Class C--Based on net assets of $29,800,383 and 3,054,176 shares of beneficial
interest outstanding $ 9.76
==============
Class D--Based on net assets of $880,140,475 and 90,205,861 shares of beneficial
interest outstanding $ 9.76
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that are non-amortizing and have 7-
year maturities.
(3)Federal Housing Administration/Veterans' Administration Mortgages
packaged by the Federal National Mortgage Association.
(4)Represents balloon mortgages that amortize on a 22-year schedule
and have 22-year maturities.
(5)Represents European style options which can be exercised only on
the notification 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 or includes 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 30-year schedule
and have 5-year maturities.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
May 31, 1998.
++++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 rate shown is the discount rate paid at
the time of purchase by the Trust.
</TABLE>
