MERRILL LYNCH
CALIFORNIA
MUNICIPAL
BOND FUND
FUND LOGO
Quarterly Report
May 31, 1995
Officers and Trustees
Arthur Zeikel, President and Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, 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
<PAGE>
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund'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.
Merrill Lynch California
Municipal Bond Fund
Merrill Lynch California
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
TO OUR SHAREHOLDERS
Increasing signs of slowing economic growth led to higher US stock
and bond prices during the May quarter. Recent declines in
indicators such as new home sales and durable goods orders were
reflected in the slight downward revision in first-quarter gross
domestic product growth to 2.7% from 2.8%. At the same time,
inventories of unsold goods grew at a slower rate than previously
estimated, while consumer, residential construction and capital
goods spending were revised upward. As a result, it appears that the
economy is losing enough momentum to keep inflation under control
and preclude further significant monetary policy tightening by the
Federal Reserve Board.
<PAGE>
Despite some periods of strengthening, the US dollar has been
persistently weak relative to the yen and the Deutschemark. Large
trade deficits and exports of capital from the United States have
kept the US currency in a decade-long decline relative to the
Japanese and German currencies. Over the longer term, since the
United States has the highest productivity among industrialized
nations and among the lowest labor costs, demand for US dollar-
denominated assets may improve. However, a reduction of the still-
widening US trade deficit may be necessary before the US dollar
appreciates substantially relative to the yen and the Deutschemark.
Another important factor that will continue to influence currency
markets is the increasing possibility of US/Japanese trade
sanctions.
Thus far in 1995, economic developments have been very positive for
the US stock and bond markets. Continued signs of a moderating
expansion and well-contained inflationary pressures would provide
further assurance that the peak in interest rates is behind us,
creating a stronger foundation for higher stock and bond prices. On
the other hand, indications of reaccelerating growth and increasing
inflationary pressures would be negative developments for the US
financial markets.
The Municipal Market
During the three months ended May 31, 1995, the municipal bond
market continued the improvement that began in late 1994. Signs of a
weakening domestic economy and ongoing moderate inflationary
pressures have continued to foster an environment of declining
interest rates. As measured by the Bond Buyer Revenue Bond Index,
yields of A-rated, uninsured municipal revenue bonds declined over
30 basis points (0.30%) during the May quarter to 6.02%. Tax-exempt
bond yields fell over 125 basis points from the highs reached in
November 1994 and are now lower than they were a year ago. The 30-
year US Treasury bond yield declined approximately 75 basis points
to 6.65% during the three months ended May 31, 1995.
The recent underperformance of the tax-exempt bond market can be
viewed as the result of a combination of special factors, all of
which are likely to have only a limited impact on the market in the
long run. It is important to note that over the last six months
declines in both taxable and tax-exempt bond yields have been
essentially identical. Long-term US Treasury bond yields fell 135
basis points since the end of November 1994. Similarly, municipal
bond yields have declined 130 basis points over the same period.
However, the tax-exempt bond market saw much of its improvement in
late 1994 and early 1995. In January and February the tax-exempt
bond market easily outperformed its taxable counterpart. Recent
underperformance by municipals is mostly the result of the taxable
bond market "catching up" to the municipal bond market's earlier
gains.
<PAGE>
Additionally, in recent months various proposed tax-law changes
(such as the flat, value-added or national sales taxes) have raised
concerns regarding the ongoing tax-advantaged status of municipal
bonds and reduced investor demand. Such concerns are likely to
quickly recede as investors realize that any changes, even if they
do occur, are unlikely to be enacted before late 1996 at the
earliest. Long-term investors will recall 1986 when similar tax
proposals were made and municipal bond yields initially rose, in
some instances, to over 100% of taxable yields. Tax-exempt bond
yields quickly declined as investors' fears proved to be unfounded.
Investor demand has also diminished in recent months by the "sticker
shock" effect that periodically affects the tax-exempt bond market.
Investors who had become accustomed to purchasing municipal
securities yielding in the 6.50%--7.00% range six months to seven
months ago have demonstrated understandable reluctance to purchase
similar securities at current levels. The ongoing strong technical
structure of the municipal market, however, suggests that such
hesitancy may prove costly. Investors are expected to receive as
much as $80 billion from tax-exempt bond maturities, coupon
payments, and the proceeds of early bond redemptions during June and
July. This amount is far greater than total new bond issuance seen
in recent months. During the May 31, 1995 quarter, less than $35
billion in tax-exempt securities were issued. This represents a
decline in issuance of approximately 25% versus the May 31, 1994
quarter levels. With estimates of 1995 annual new bond issuance of
approximately $125 billion, the supply of available municipal
securities is likely to remain extremely limited regardless of the
market level.
Tax-exempt bonds currently yield 85%--90% of comparable US Treasury
securities. Analysts usually consider municipal bonds yielding more
than 82% of US Treasury bonds to be historically attractive. For
example, with after-tax equivalent yields in excess of 9.50%,
municipal securities appear to represent considerable value.
Investors are likely to view the current situation as an opportunity
to purchase very attractively priced tax-exempt products. This
should cause municipal bond yields to quickly return to their more
historic relationship.
<PAGE>
Portfolio Strategy
The municipal bond market's rally, although not as strong as that of
the taxable Treasury bond market, carried tax-exempt interest rates
to levels where retail demand historically has disappeared. In the
past, California insured municipal bonds that yielded below 6%
provided a strong barrier to future retail participation whether in
the form of direct purchases through brokers or in open-end mutual
fund subscriptions. Our strategy for Merrill Lynch California
Municipal Bond Fund was twofold. First, we raised the cash
equivalent reserve level to approximately 10% of total net assets.
Securities that are most sensitive to interest rate changes were
sold as they approached their maturity date. Second, we also began
to raise the overall coupon average in the portfolio. This will help
to cushion the Fund's volatility should the market meet resistance
at current levels. The strategy has made the Fund's portfolio more
defensive. If the market remains flat over the near term, the Fund
would benefit from its position of generating higher current return
while sacrificing some ability to appreciate should a new downward
move in interest rates begin. In addition, should the US economy
start showing signs of rejuvenating later this year, the Fund's
structure would provide a cushion against possible negative price
action. The strength of the market to date has again caused a
narrowing of credit quality spreads. Therefore, the portfolio
remains nearly 70% invested in securities rated AA or better by at
least one of the major rating agencies.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch California
Municipal Bond Fund, and we look forward to serving your investment
needs in the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
June 22, 1995
<PAGE>
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund 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.
* 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 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years.
* Class C Shares are subject to a distribution fee of 0.35% 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 0.10% (but no distribution fee).
Performance data for the Fund's Class A Shares and Class B Shares
are presented in the "Performance Summary," "Recent Performance
Results" and "Average Annual Total Return" tables below and on pages
4 and 5. Data for Class C and Class D Shares are also presented in
the "Recent Performance Results" and "Aggregate Total Return" tables
below and on page 5.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class A and Class B
Shares for the 12-month and 3-month periods ended May 31, 1995 and
for Class C and Class D Shares for the since inception and 3-month
periods ended May 31, 1995. All data in this table assume imposition
of the actual total expenses incurred by each class of shares during
the relevant period.
None of the past results shown should 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. 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>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/95 + 6.66% + 2.39%
Five Years Ended 3/31/95 + 7.48 + 6.61
Inception (10/25/88)
through 3/31/95 + 7.63 + 6.95
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/95 + 6.08% + 2.08%
Five Years Ended 3/31/95 + 6.93 + 6.93
Inception (9/30/85) through 3/31/95 + 8.16 + 8.16
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 3/31/95 + 5.59% + 4.59%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (10/21/94)
through 3/31/95 + 5.83% + 1.59%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/25/88--12/31/88 $11.02 $10.99 -- $0.148 + 1.08%
1989 10.99 11.31 -- 0.761 +10.14
1990 11.31 11.22 -- 0.755 + 6.14
1991 11.22 11.61 $0.031 0.751 +10.79
1992 11.61 11.64 0.125 0.807 + 8.60
1993 11.64 12.13 0.158 0.808 +12.78
1994 12.13 10.62 -- 0.662 - 7.08
1/1/95--5/31/95 10.62 11.54 -- 0.245 +11.25
------ ------
Total $0.314 Total $4.937
Cumulative total return as of 5/31/95: + 65.73%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<PAGE>
<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>
9/30/85--12/31/85 $10.00 $10.60 -- $0.175 + 8.00%
1986 10.60 11.63 $0.046 0.763 +17.80
1987 11.63 10.73 -- 0.745 - 1.45
1988 10.73 10.99 -- 0.707 + 9.28
1989 10.99 11.32 -- 0.705 + 9.69
1990 11.32 11.22 -- 0.698 + 5.51
1991 11.22 11.62 0.031 0.694 +10.33
1992 11.62 11.64 0.125 0.748 + 7.96
1993 11.64 12.13 0.158 0.747 +12.22
1994 12.13 10.63 -- 0.606 - 7.50
1/1/95--5/31/95 10.63 11.54 -- 0.223 +10.83
------ ------
Total $0.360 Total $6.811
Cumulative total return as of 5/31/95: +117.28%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/95 2/28/95 5/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $11.54 $11.23 $11.29 + 2.21% + 2.76%
Class B Shares* 11.54 11.24 11.30 + 2.12 + 2.67
Class C Shares* 11.54 11.24 10.94 + 5.48 + 2.67
Class D Shares* 11.54 11.24 10.94 + 5.48 + 2.67
Class A Shares--Total Return* + 8.54(1) + 4.27(2)
Class B Shares--Total Return* + 7.77(3) + 3.95(4)
Class C Shares--Total Return* + 8.84(5) + 3.93(6)
Class D Shares--Total Return* + 9.27(7) + 4.15(8)
Class A Shares--Standardized 30-day Yield 5.17%
Class B Shares--Standardized 30-day Yield 4.89%
Class C Shares--Standardized 30-day Yield 4.78%
Class D Shares--Standardized 30-day Yield 5.08%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class C and Class D Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.651 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.156 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.596 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.142 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.334 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.368 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.153 per share ordinary
income dividends.
</TABLE>
PORTFOLIO COMPOSITION
For the Quarter Ended May 31, 1995
Distribution by Market Sector*
Other Revenue Bonds 39.5%
General Obligations & Tax Revenue Bonds 36.0
Prerefunded Bonds** 15.0
Utility Revenue Bonds 9.5
------
Total 100.0%
======
Net assets as of May 31, 1995 were $707,419,343.
<PAGE>
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart representing the following percentages:
AAA/Aaa 53%
AA/Aa 10%
A/A 16%
BBB/Baa 5%
Other++ 8%
NR++++ 8%
[FN]
*Based on total market value of the portfolio as of May 31, 1995.
**Backed by an escrow fund.
++Temporary investments in short-term municipal securities.
++++Not Rated.
