MERRILL LYNCH
FEDERAL
SECURITIES TRUST
FUND LOGO
Quarterly Report
November 30, 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
Investment Environment
During the three-month period ended November 30, 1998, global market
volatility increased, marked by a series of adverse business,
economic and political developments. Despite a precipitous drop in
interest rates, US credit market spreads widened significantly
during the quarter, as investors became more risk averse in response
to the deepening global financial problems. In an effort to
alleviate the liquidity squeeze gripping the US credit market and
prevent the US economy from tumbling into a recession, the Federal
Reserve Board lowered interest rates in late September, in mid-
October and again in mid-November.
Numerous events caused market volatility to increase and credit
market spreads to widen. The resulting deleveraging process caused
by the hedge fund crisis, coupled with deteriorating economic
conditions in Latin America and Japan and US presidential
impeachment proceedings, prompted wide gyrations in US equity prices
and a tightening of bank credit standards. Consequently, US credit
spreads widened to levels seen only in past recessions. In a
preemptive move to ease the liquidity strain upon the credit
markets, the Federal Reserve Board lowered the Federal Funds rate by
75 basis points (0.75%) to 4.75% and the discount rate was reduced
50 basis points to 4.50% over a span of just seven weeks, the
fastest easing move since the last economic recession in 1991.
Despite global economic turmoil, the US economy continued to exhibit
stronger-than-expected growth in the third quarter of 1998. Gross
domestic product (GDP), led by an improved trade deficit and strong
consumer demand, rose 3.9% during the November quarter. After a 2.2%
and 2.1% reduction in GDP during the first and second quarters of
1998, respectively, fewer imports helped improve the trade deficit
in the quarter ended November 30, 1998. As a result, the US trade
deficit subtracted just 0.4% from third-quarter GDP. More important,
consumer spending, which rose 4.1% in the November quarter, remains
exceptionally strong and continues to outstrip income growth. In
addition, new home sales and new housing starts are at or near their
all-time highs, keeping housing growth particularly strong.
Nonetheless, despite the recent economic euphoria, we see signs that
US economic growth could slow in 1999.
Structural imbalances in two sectors of the US economy could cause
growth to slow in 1999. First, consumer spending, which has exploded
from strong employment growth and personal asset gains, could begin
to moderate, and job growth is slowing. The three-month average gain
in non-farm payrolls through November 1998 is the lowest in three
years. In addition, consumer confidence is falling and is at a 19-
month low. Slower income growth from smaller job gains, coupled with
dropping consumer confidence, could slow spending growth in 1999.
Second, capital spending, which has grown at a double-digit pace
since 1991, is beginning to slow. Huge capital spending investments
have allowed companies to increase their output capacity. However,
slowing global economies have reduced demand and left companies with
capacity overhang. As a result, capacity utilization, which has
fallen steadily, was at an 80.6% rate in November, a five-year low.
Consequently, we expect capital spending growth to slow in 1999.
Finally, the US trade deficit could widen because of reduced global
demand amid a continuing global economic slowdown, which could
result in a further drag on US economic growth. Should US economic
growth begin to show signs of weakness, we expect the Federal
Reserve Board to further ease monetary policy.
Merrill Lynch Federal Securities Trust
November 30, 1998
Portfolio Strategy
The summer months of 1998 proved to be tumultuous ones for interest
rates. The downturn in the Asian economies and concerns about Russia
caused a flight to quality that drove US interest rates lower.
Although interest rates backed up in November, they continued their
downward trend during the three-month period. The body of the yield
curve (maturities ranging from two years to ten years) moved lower
by 25 basis points--30 basis points, while short-term interest rates
for three-month and one-year Treasury bills were down 35 basis
points.
The decline in interest rates caused Treasury prices to move higher.
The five-year Treasury note moved higher by about one point, while
the ten-year Treasury note increased by approximately one and a half
points. Further, current coupon mortgage-backed securities (MBS)
were virtually unchanged in price. This decoupling of price
movements reflects the overall flight to quality where US Treasury
securities, specifically current coupon issues, are the investment
of choice. All other securities lag, even older-issue US Treasury
securities and Government National Mortgage Association (GNMA) MBS,
which are fully guaranteed by the US Government.
This unusual environment creates opportunities for investors. For
example, GNMA 6% MBS priced at a discount at the end of the November
quarter. The discount (below par) price means prepayments are not a
concern. Its 6% coupon compares very favorably with five-year and
ten-year Treasury notes, which ended the period with yields of 4.52%
and 4.72%, respectively. The resulting yield spread is historically
wide and especially attractive at the current low level of interest
rates. The percentage pickup in yield is exceptional. To take
advantage of such opportunities, we have eliminated our US Treasury
position.
The Trust is fully invested, with only 1% of net assets in short-
term securities. This does not reflect a view toward lower interest
rates. In fact, interest rates may not move much lower. However, it
does reflect a view that MBS yields are very attractive on a
relative basis and that yield spreads should tighten toward more
historical norms. It also illustrates our view that the yield curve
may steepen with short-term interest rates moving lower, which would
benefit MBS. Consequently, our current portfolio structure allows
for better yields and better price movement.
Within our MBS allocation, it is important to note two sub-
categories. First, our 15-year MBS investment remains high.
Recently, 15-year MBS yield spreads widened more than 30-year MBS
yield spreads, mainly because there were supply concerns centering
around homeowners refinancing 30-year mortgages into 15-year
mortgages. Also, 15-year MBS prepay slower than similarly priced 30-
year MBS. If the yield curve steepens, they should outperform 30-
year MBS.
The second sub-category is multi-family MBS, which represents a
large portion of Trust holdings. These securities offer attractive
yields and are protected by penalties against unwanted prepayments.
This allows the price to move higher if interest rates decline. Like
all MBS, they will benefit from both a yield spread tightening
and/or a steepening in the yield curve. Also, the principal and
interest payments are fully guaranteed by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
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,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and Portfolio Manager
January 6, 1999
Merrill Lynch Federal Securities Trust
November 30, 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 "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 11/30/98
<S> <C> <C> <C> <C>
ML Federal Securities Trust Class A Shares +7.05% +1.44% + 40.24% 5.42%
ML Federal Securities Trust Class B Shares +6.23 +1.35 + 46.63 4.87
ML Federal Securities Trust Class C Shares +6.29 +1.34 + 35.62 4.82
ML Federal Securities Trust Class D Shares +6.89 +1.48 +115.06 5.17
<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 11/30/98; Class B Shares, from 12/23/91 to
11/30/98; and Class D Shares, for the ten years ended 11/30/98.
</TABLE>
Merrill Lynch Federal Securities Trust
November 30, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 +8.15% +3.82%
Inception (10/21/94)
through 9/30/98 +8.92 +7.80
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 +7.43% +3.43%
Five Years Ended 9/30/98 +5.42 +5.42
Inception (12/23/91)
through 9/30/98 +5.82 +5.82
[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 9/30/98 +7.38% +6.38%
Inception (10/21/94)
through 9/30/98 +8.04 +8.04
[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 9/30/98 +7.99% +3.67%
Five Years Ended 9/30/98 +5.96 +5.10
Ten Years Ended 9/30/98 +8.02 +7.58
[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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Federal Securities Trust
November 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
US Government Agency Mortgage-Backed Obligations*--98.76%
<S> <S> <C> <C> <C> <C>
Federal Home Loan Mortgage #W10002 $100,000,000 6.775(2)% 11/01/2003 $105,500,000
Corporation Mortgage-Backed Securities--
Multi-Family++++
Federal Home Loan Mortgage Corporation 569 10.00 7/01/2019 616
Participation Certificates 9,780,474 10.50 9/01/2000-9/01/2020 10,780,724
2,489,122 11.00 8/01/2010-9/01/2020 2,775,596
2,347,282 11.50 12/01/2011-6/01/2020 2,662,451
1,006,654 12.00 7/01/1999-6/01/2020 1,150,529
1,914,134 12.50 10/01/1999-7/01/2019 2,208,748
2,822,176 13.00 8/01/1999-2/01/2016 3,288,430
Federal Home Loan Mortgage Corporation 313,648 6.00 4/01/2009 315,217
Participation Certificates--Gold Program 150,465,310 6.50 2/01/2011-10/01/2028 152,302,548
181,308,840 7.00 1/01/2008-9/01/2028 185,435,890
21,662,274 7.50 5/01/2009-8/01/2017 22,276,185
20,373,449 8.00 1/01/2007-10/01/2027 20,993,112
6,113,462 8.50 1/01/2025-7/01/2025 6,396,149
3,389,082 10.50 10/01/2020-12/01/2020 3,717,382
Federal Home Loan Mortgage Trust 177 43,782,897 7.00 7/01/2026 44,713,012
Corporation REMICs** Trust 134 1,328,712 9.00(1) 4/15/2022 254,116
Trust 1220 6,566,367 10.00 2/15/2022 6,567,734
Federal National Mortgage Association 130,321,784 6.00 11/01/2023-11/01/2028(11) 128,610,989
283,418,894 6.50 12/01/2008-9/01/2028 286,087,097
714 7.50 1/01/2025 734
867,519 8.00 9/01/2024-9/01/2027 897,982
9,597,935 8.50 5/01/2010-5/01/2018 9,995,313
18,630,140 8.50(3) 7/15/2023 19,445,208
13,453,541 9.50 3/01/2020 14,412,106
6,534 10.50 9/01/2000 6,656
22,085,738 11.00 2/01/2011-11/01/2020 24,589,061
34,960 11.50 6/01/2015 39,244
1,243,767 13.00 8/01/2010-6/01/2015 1,457,721
Federal National Mortgage Association #0160465 33,603,744 6.16(8) 8/01/2013 34,107,800
Mortgage-Backed Securities-- #0380332 9,585,825 6.195(7) 6/01/2005 9,852,431
Multi-Family++++ #0375610 13,873,188 6.465(7) 6/01/2004 13,855,847
#0380021 6,327,165 6.49(9) 1/01/2008 6,319,257
#0073240 4,901,302 6.50(7) 11/01/2002 5,045,277
#0073809 10,490,529 6.515(10) 12/01/2001 10,647,886
#0073894 981,634 6.525(7) 12/01/2003 1,018,213
#0073885 884,300 6.545(9) 1/01/2007 929,743
#0073873 762,332 6.625(9) 2/01/2007 805,136
#0073221 1,455,583 6.715(7) 10/01/2005 1,536,731
#0375015 19,306,914 6.79(7) 4/01/2004 20,073,157
#0073915 1,515,346 6.87(9) 1/01/2007 1,618,769
#0073910 11,749,001 6.875(9) 1/01/2007 12,569,939
#0375043 3,550,958 6.895(9) 4/01/2007 3,697,435
#0375007 12,010,224 6.94(9) 3/01/2007 12,906,389
#0375012 3,255,525 6.95(9) 4/01/2007 3,500,421
</TABLE>
Merrill Lynch Federal Securities Trust
November 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <S> <C> <C> <C> <C>
Federal National Mortgage Association #0073944 $ 13,774,523 6.96(9) % 1/01/2007 $ 14,806,306
Mortgage-Backed Securities-- #0073952 2,777,154 6.96(9) 1/01/2007 2,982,352
Multi-Family++++ (concluded) #0073946 5,384,584 6.97(9) 2/01/2007 5,788,701
#0073969 7,974,986 7.05(9) 2/01/2007 8,605,927
#0073962 4,660,905 7.085(9) 2/01/2007 5,047,460
#0073967 4,531,479 7.105(9) 2/01/2007 4,685,833
#0073992 2,574,461 7.115(9) 2/01/2007 2,792,640
#0375069 1,076,931 7.122(9) 4/01/2007 1,134,143
#0073943 1,454,544 7.18(4) 2/01/2019 1,511,816
#0073608 4,813,124 7.49(9) 8/01/2006 5,309,169
#0375052 4,705,538 7.50(9) 3/01/2027 4,923,169
#0109076 2,164,609 7.59(9) 8/01/2006 2,396,085
#0160024 5,124,360 7.625(9) 11/01/2003 5,431,822
#0160095 7,160,173 7.66(9) 3/01/2004 7,706,329
Federal National Mortgage Association 98-M1-IO2 98,730,145 0.68635(1) 2/25/2013 4,921,076
Mortgage-Backed Securities-- 94-M1-IO 74,946,688 0.87(1) 10/25/2003 2,459,188
REMICs**--Multi-Family++++ 98-M3-B 10,960,597 6.45 8/17/2013 11,125,006
97-M8-A2 19,135,000 7.16 1/25/2022 20,187,425
96-M3-A2 40,500,000 7.41 3/25/2021 41,360,625
94-M3-B 12,852,841 7.71 4/25/2006 12,933,171
94-M4-A 13,125,849 9.09275 8/25/2026 13,240,701
Federal National Mortgage Association 94-56-TB 5,239,230 6.50(1) 7/25/2022 1,389,489
REMICs** Trust 273 5,663,234 7.00(1) 7/01/2026 993,895
93-123-S 11,764,296 9.77031++ 7/25/2000 12,186,987
93-121-SD 2,673,932 10.00++ 2/25/2023 2,671,092
Government National 50,463,165 6.50 10/15/2023-11/15/2028 50,984,552
Mortgage Association 215,489,824 7.00 4/15/2022-7/15/2028 220,618,203
102,067,358 7.50 1/15/2007-6/15/2028 105,398,047
78,252,322 8.00 1/15/2024-8/15/2026 81,417,620
32,382,024 10.00 12/15/2015-12/15/2021 35,048,496
104,543 10.50 10/15/2014-4/15/2021 113,410
284 11.00 1/15/2016 316
6,339 11.50 8/15/2013 7,084
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,866,728,263) 1,885,543,116
<CAPTION>
Face
Amount Issue
Repurchase Agreements***--2.04%
<C> <S> <C>
$ 39,000,000 Morgan Stanley and Co., purchased on 11/30/1998 to yield
5.375% to 12/01/1998 39,000,000
Total Repurchase Agreements (Cost--$39,000,000) 39,000,000
</TABLE>
Merrill Lynch Federal Securities Trust
November 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Strike Notification
Covered by Options Issue Price Date Value
Options Purchased--0.00%
<S> <C> <S> <C> <C> <C>
Call Options 52,658,862 Government National Mortgage Association,
Purchased 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) $ 10,532
Total Options Purchased (Cost--$0) 10,532
Total Investments (Cost--$1,905,728,263)--100.80% 1,924,553,648
Options Written--0.00%
Put Options 52,658,862 Government National Mortgage Association,
Written 30-Year, 6.625% Adjustable Rate Mortgage(5)(6) 100 9/20/2011(5) (84,254)
Total Options Written (Premiums Received--$0) (84,254)
Total Investments, Net of Options Written (Cost--$1,905,728,263)--100.80% 1,924,469,394
Liabilities in Excess of Other Assets--(0.80%) (15,358,864)
--------------
Net Assets--100.00% $1,909,110,530
==============
Net Asset Class A--Based on net assets of $294,682,017 and 30,073,249 shares of beneficial
Value: interest outstanding $ 9.80
==============
Class B--Based on net assets of $701,285,103 and 71,589,081 shares of beneficial
interest outstanding $ 9.80
==============
Class C--Based on net assets of $50,724,825 and 5,178,643 shares of beneficial
interest outstanding $ 9.80
==============
Class D--Based on net assets of $862,418,585 and 88,040,201 shares of beneficial
interest outstanding $ 9.80
==============
<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,
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-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.
(11)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.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
November 30, 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.
</TABLE>
