MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
May 31, 1999
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
Gross domestic product (GDP) growth rose 4.1% in the first quarter
of 1999, as robust consumer spending continued to fuel US growth and
prop up flagging economies globally. US consumer spending rose 6.8%
in the first quarter of 1999, the fastest pace in nearly 15 years.
In addition, had the US trade deficit not reached record levels in
the quarter, GDP would have been reported much higher. Consequently,
as a result of excessive growth, inflationary fears were kindled in
the financial markets and interest rates rose during the three-month
period ended May 31, 1999.
Many sectors of the US economy continued to remain vibrant. In
April, new home sales were reported at a 978,000-unit rate, the
second highest level ever recorded while vehicle sales in April rose
to a 13-year high. The manufacturing sector was strong and appeared
to be gaining momentum as the National Association of Purchasing
Managers Index (NAPM), a measure of strength within the
manufacturing sector of the US economy, rose to a 19-month high in
May. More interestingly, strength within the manufacturing sector
appeared to be broad based as every component within the NAPM index
rose in May, with the exception of inventory accumulation. US labor
market conditions remained taut. Although non-farm payrolls were
reported to have increased by a meager 11,000 in May, the US
unemployment rate continued to decline and is currently at a 29-year
low of 4.2%. More importantly, hourly wages rose 0.4% in May and are
up 3.6% from a year ago, the first year-over-year increase in 13
months. As a result of these series of strong economic reports, the
Federal Reserve Board adopted a tightening toward monetary policy at
its Federal Open Market Committee meeting in May.
Recent statements from Federal Reserve Board officials indicated
they were concerned about the US economy growing too quickly.
Although economic growth is exceptionally strong, inflationary
pressures have yet to emerge. The core consumer price index (CPI), a
broad measure of inflation excluding volatile food and energy costs,
is up just 1.9% this year through April and 2.2% over the last 12
months. The last time the core CPI was this low over a 12-month
period was in 1966. The inflation outlook remains positive as well.
With the exception of the labor market, the US economy did not face
any binding resource constraints. Capacity utilization rates were
low and continued to create capacity overhang. This is the primary
reason US corporations lacked the ability to raise prices.
With inflation presently at a 33-year low, we believed the Federal
Reserve Board would ultimately raise interest rates in a pre-emptive
measure to counter potential inflationary pressures because of tight
labor market conditions. Nonetheless, we believed any increase in
interest rates would be minimal for two reasons. First, with the
possible exception of wage pressures, there are no indications other
sectors of the economy are experiencing inflationary strains.
Second, while many foreign countries have rebounded nicely from last
year's global economic turmoil, there are still several countries in
the midst of the recovery process. A sharp increase in US interest
rates could be detrimental to the global economy. Key economic
indicators, which dictate Federal Reserve Board policy, are
employment reports, retail sales reports and CPI reports. (In fact,
the Federal Reserve Board did increase interest rates by 25 basis
points (0.25%) on June 30, 1999 after the Trust's quarter close.)
Portfolio Matters
During the quarter ended May 31, 1999, interest rates in the two-
year-30-year range moved higher by approximately 30 basis points
with most of the movement occurring in May. This continued the trend
started early in the year. As of May month-end, the yields on five-
year and ten-year Treasury notes were approximately 100 basis points
higher than they were at the start of the year. Although the yield
on the three-month Treasury bill remained relatively unchanged,
moving just 17 basis points, the Eurodollar futures contracts moved
higher by over 100 basis points. These interest rate increases
signaled the likelihood of the short-term interest rate hike made by
the Federal Reserve Board.
Merrill Lynch Federal Securities Trust
May 31, 1999
When interest rates move higher, prices on fixed-income securities
generally fall. However, mortgage-backed securities (MBS) have
performed remarkably well relative to other fixed rate securities.
For both the quarter and year to date, the Salomon Smith Barney
(SSB) Mortgage Index had positive returns compared to the SSB Broad
Index, the SSB Treasury Index and the SSB Corporate Index, which all
had negative returns. The year-to-date returns are most
illustrative. The unmanaged SSB Mortgage Index returned +0.82%,
while the unmanaged SSB Broad Index, the unmanaged SSB Treasury
Index and the unmanaged SSB Corporate Index returned -1.04%, -2.21%
and -1.50%, respectively.
The portfolio benefited as a result of our shifting assets away from
Treasury securities and almost entirely into MBS. Going forward, we
expect to maintain our current strategy. From a yield perspective,
MBS continue to be very attractive. A Government National Mortgage
Association (Ginnie Mae) 6.50% MBS, with scheduled payments of
principal and interest guaranteed by the US Government, ended the
May quarter with a price of $97.50. This coupon, with a discount
price, compares favorably with the yields on five-year and ten-year
Treasury notes, which ended the quarter at 5.58% and 5.62%,
respectively. Additionally, the interest rate increase at June 30,
1999 coupled with the monthly principal and interest payments on MBS
should help dampen price volatility.
The portfolio was 98% invested in MBS as of May 31, with just 2% in
net short-term securities. Within the MBS allocation there are three
significant sectors. First, the 30-year MBS sector comprises 55% of
the portfolio's net assets and is focused most heavily on coupons of
6%, 6.50% and 7% where (because the coupons are near current
interest rates) prepayment concerns are minimized. For the higher
coupons, we favor Ginnie Mae MBS and seasoned issues (those issued
from five years to ten years ago) where prepayments have tended to
be slow. Second, the 15-year MBS sector makes up over 20% of the
portfolio and tends to be more defensive than the more volatile,
longer average life, 30-year MBS. Again, we focused on 6.50% and 7%
coupons that are priced close to par value. The last sector is
comprised of multi-family MBS guaranteed by the Federal National
Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage
Corporation (Freddie Mac). This sector comprises 22% of the Fund's
net assets. We can have slightly higher coupons in this sector
because the underlying mortgages have prepayment penalties that
generally protect us from unwanted prepayments. However, we avoid
the higher coupons because high premium-priced MBS do not trade as
well as discount and par priced MBS. Also, we focused on higher-
quality properties because even though there is the Fannie Mae or
Freddie Mac guarantee, we do not necessarily want to be paid-off at
par in the case of a default.
The portfolio is generally structured around our goal of balancing
attractive yield and total return potential. We believe that for
1999, coupon flow will provide the bulk of the return and that MBS
coupons are very attractive at current prices.
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,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and Portfolio Manager
July 9, 1999
Merrill Lynch Federal Securities Trust
May 31, 1999
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 "Recent Performance
Results" and "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 5/31/99
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +4.14% +0.36% + 41.26% 5.50%
ML Federal Securities Trust Class B Shares +3.35 +0.27 + 47.14 4.95
ML Federal Securities Trust Class C Shares +3.30 +0.26 + 36.06 4.90
ML Federal Securities Trust Class D Shares +3.88 +0.40 +106.01 5.25
<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/since inception periods are: Class A & Class C
Shares, from 10/21/94 to 5/31/99; Class B Shares, from 12/23/91 to
5/31/99; and Class D Shares, for the ten years ended 5/31/99.
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 +4.83% +0.84%
Five Years Ended 3/31/99 +6.18 +6.18
Inception (12/23/91)
through 3/31/99 +5.51 +5.51
[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 Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/99 +5.64% +1.41%
Inception (10/21/94)
through 3/31/99 +8.14 +7.15
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/99 +4.78% +3.78%
Inception (10/21/94)
through 3/31/99 +7.26 +7.26
[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 3/31/99 +5.37% +1.16%
Five Years Ended 3/31/99 +6.73 +5.86
Ten Years Ended 3/31/99 +7.99 +7.55
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
Joe Grills, Trustee
Walter Mintz, Trustee
Robert S. Salomon Jr., Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, Trustee
Arthur Zeikel, Trustee
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Federal Securities Trust
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Original
Issue Amount Rate Maturity Date(s) Value
<S> <C> <C> <C> <C>
US Government Agency Mortgage-Backed Obligations*--98.16%
Federal Home Loan Mortgage Corporation #W10002 $ 98,696,800 6.775(2)% 11/01/2003 $ 100,979,164
Mortgage-Backed Securities--Multi-Family+++
Federal Home Loan Mortgage Corporation 556 10.00 7/01/2019 596
Participation Certificates 8,134,828 10.50 9/01/2000-9/01/2020 8,797,702
1,981,729 11.00 8/01/2010-9/01/2020 2,152,613
2,060,613 11.50 12/01/2011-6/01/2020 2,265,801
849,408 12.00 7/01/1999-6/01/2020 937,843
1,689,362 12.50 10/01/1999-7/01/2019 1,863,767
2,430,860 13.00 12/01/2004-2/01/2016 2,709,830
Federal Home Loan Mortgage Corporation 281,000 6.00 4/01/2009 276,188
Participation Certificates--Gold Program 193,093 6.50 9/01/2013 192,786
18,696,308 6.50 10/01/2028 18,294,380
132,388,817 7.00 1/01/2008-3/01/2013 134,796,009
16,846,444 7.00 9/01/2028 16,890,504
15,828,366 7.50 5/01/2009-10/01/2011 16,282,110
491,000 7.50 8/01/2017 501,714
15,514,883 8.00 1/01/2007-7/01/2012 16,055,909
129,630 8.00 10/01/2027 134,606
4,594,666 8.50 1/01/2025-7/01/2025 4,829,076
2,800,935 10.50 10/01/2020-12/01/2020 3,036,019
Federal Home Loan Mortgage Corporation Trust 177 36,391,388 7.00 7/01/2026 36,580,496
REMICs** Trust 134 1,039,618 9.00(1) 4/15/2022 237,813
Trust 1220 5,152,683 10.00 2/15/2022 5,207,744
Federal National Mortgage Association 182,953,386 6.00 11/01/2023-3/01/2029 173,928,227
352,912,056 6.50 12/01/2008-9/01/2028 348,478,872
387 7.50 1/01/2025 395
671,180 8.00 9/01/2024-9/01/2027 696,956
7,488,933 8.50 5/01/2010-5/01/2018 7,858,689
15,125,384 8.50(3) 7/15/2023 15,588,599
10,392,131 9.50 3/01/2020 11,054,630
3,818 10.50 9/01/2000 3,903
18,306,297 11.00 2/01/2011-11/01/2020 20,229,656
33,845 11.50 6/01/2015 37,630
1,104,551 13.00 8/01/2010-6/01/2015 1,235,599
Federal National Mortgage Association #0160465 33,445,117 6.16(8) 8/01/2013 32,822,767
Mortgage-Backed Securities--Multi-Family+++ #0380332 9,537,266 6.195(7) 6/01/2005 9,471,033
#0375610 13,800,456 6.465(7) 6/01/2004 13,843,319
#0380021 6,281,178 6.49(9) 1/01/2008 6,336,139
#0073240 4,873,076 6.50(7) 11/01/2002 4,883,687
#0073809 10,433,254 6.515(10) 12/01/2001 10,471,923
#0073894 976,395 6.525(7) 12/01/2003 981,473
#0073885 879,631 6.545(9) 1/01/2007 884,595
#0073873 758,394 6.625(9) 2/01/2007 766,001
#0073221 1,447,336 6.715(7) 10/01/2005 1,465,746
#0375015 19,155,522 6.79(7) 4/01/2004 19,439,206
#0073915 1,503,510 6.87(9) 1/01/2007 1,536,334
#0073910 11,691,911 6.875(9) 1/01/2007 11,957,213
#0375043 3,534,145 6.895(9) 4/01/2007 3,619,753
#0375007 11,953,416 6.94(9) 3/01/2007 12,273,120
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Original
Issue Amount Rate Maturity Date(s) Value
<S> <C> <C> <C> <C>
US Government Agency Mortgage-Backed Obligations* (concluded)
Federal National Mortgage Association #0375012 $ 3,240,270 6.95(9)% 4/01/2007 $ 3,328,750
Mortgage-Backed Securities--Multi-Family+++ #0073944 13,707,156 6.96(9) 1/01/2007 14,082,056
(concluded) #0073952 2,755,416 6.96(9) 1/01/2007 2,829,500
#0073946 5,348,691 6.97(9) 2/01/2007 5,496,915
#0073969 7,912,680 7.05(9) 2/01/2007 8,163,796
#0073962 4,639,288 7.085(9) 2/01/2007 4,799,700
#0073967 4,510,066 7.105(9) 2/01/2007 4,535,436
#0073992 2,562,588 7.115(9) 2/01/2007 2,655,476
#0375069 1,069,014 7.122(9) 4/01/2007 1,095,405
#0073943 1,440,308 7.18(4) 2/01/2019 1,460,562
#0073608 4,791,446 7.49(9) 8/01/2006 5,050,501
#0375052 4,685,051 7.50(9) 3/01/2027 4,749,471
#0109076 2,149,859 7.59(9) 8/01/2006 2,274,897
#0160024 5,092,141 7.625(9) 11/01/2003 5,139,880
#0160095 7,116,930 7.66(9) 3/01/2004 7,411,987
Federal National Mortgage Association 98-M1-IO2 98,223,082 0.68635(1) 2/25/2013 4,481,428
Mortgage-Backed Securities-- 94-M1-IO 74,399,169 0.87(1) 10/25/2003 2,185,476
REMICs**--Multi-Family+++ 98-M3-B 10,960,597 6.45 8/17/2013 10,703,681
97-M8-A2 19,135,000 7.16 1/25/2022 19,682,835
96-M3-A2 40,500,000 7.41 3/25/2021 40,575,938
94-M3-B 3,706,122 7.71 4/25/2006 3,721,762
94-M4-A 8,690,550 9.09514 8/25/2026 8,755,729
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,446,607
REMICs** Trust 273 4,601,583 7.00(1) 7/01/2026 1,201,173
96-W1-AL 9,635,746 7.25 3/25/2026 9,762,123
93-123-S 8,880,965 10.27812++ 7/25/2000 8,908,673
Government National Mortgage Association 78,777,497 6.50 10/15/2023-3/15/2029 76,872,548
198,480,793 7.00 4/15/2023-5/15/2029 198,830,901
83,177,275 7.50 1/15/2007-6/15/2028 85,146,895
62,324,671 8.00 1/15/2024-8/15/2026 64,788,432
25,523,593 10.00 12/15/2015-12/15/2021 28,052,922
73,894 10.50 1/15/2016-4/15/2021 81,868
280 11.00 1/15/2016 317
6,257 11.50 8/15/2013 7,090
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,738,401,391) 1,721,168,865
Face
Amount Issue
Repurchase Agreements***--1.60%
$28,100,000 Morgan Stanley & Co., Inc., purchased on 5/28/1999 to yield 4.73% to 6/01/1999 28,100,000
Total Repurchase Agreements (Cost--$28,100,000) 28,100,000
</TABLE>
Merrill Lynch Federal Securities Trust
May 31, 1999
<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 37,952,238 Government National Mortgage Association,
Purchased 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) $ 30,362
Total Options Purchased (Cost--$0) 30,362
Total Investments (Cost--$1,766,501,391)--99.76% 1,749,299,227
Options Written--0.00%
Put Options 37,952,238 Government National Mortgage Association,
Written 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) (37,952)
Total Options Written (Premiums Received--$0) (37,952)
Total Investments, Net of Options Written (Cost--$1,766,501,391)--99.76% 1,749,261,275
Other Assets Less Liabilities--0.24% 4,140,482
--------------
Net Assets--100.00% $1,753,401,757
==============
Net Asset Class A--Based on net assets of $239,554,317 and 24,944,061 shares of beneficial
Value: interest outstanding $ 9.60
==============
Class B--Based on net assets of $634,524,718 and 66,088,361 shares of beneficial
interest outstanding $ 9.60
==============
Class C--Based on net assets of $52,022,322 and 5,418,769 shares of beneficial
interest outstanding $ 9.60
==============
Class D--Based on net assets of $827,300,400 and 86,168,647 shares of beneficial
interest outstanding $ 9.60
==============
<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 Ginnie Mae, 30-
year, 6.625% 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 balloon mortgages that amortize on a 15-year schedule
and have 15-year maturities.
(9)Represents balloon mortgages that amortize on a 25 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, 1999.
+++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>
