MERRILL LYNCH
CALIFORNIA MUNICIPAL
BOND FUND
FUND LOGO
Quarterly Report
November 30, 1994
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, New Jersey
08543-9011
<PAGE>
TO OUR SHAREHOLDERS
The Municipal Market
The long-term tax-exempt market continued to erode throughout the
three months ended November 30, 1994. As measured by the Bond Buyer
Revenue Bond Index, yields on A-rated municipal revenue bonds
maturing in 30 years rose by over 85 basis points (0.85%) to 7.32%
during the period ended November 30, 1994. This represents the
highest level of tax-exempt bond yields in over two years. US
Treasury bonds also suffered significant declines during the quarter
as Treasury bond yields rose approximately 55 basis points to end
the quarter at 8.00%.
The tax-exempt bond market reacted negatively throughout the quarter
to indications that, despite a series of interest rate increases by
the Federal Reserve Board, the strength of the domestic economy seen
in recent quarters has not yet been significantly reduced. While
inflationary pressures have remained well contained, additional
Federal Reserve Board actions have been expected both to ensure that
domestic economic growth is eventually confined to current levels
and to assure nervous financial markets of its anti-inflationary
intentions. Within this context, institutional investors have
largely withdrawn from the municipal market to await a more stable
environment. At the same time, retail investors have been redeeming
mutual fund shares, largely in anticipation of continued price
declines. Investor withdrawals were particularly heavy in October
and early November, with tax-exempt mutual fund outflows exceeding
$3 billion during the last quarter.
Fortunately, while the demand for tax-exempt bonds has declined
somewhat in recent months, new bond issuance has remained greatly
reduced. During the three months ended November 30, 1994, only $32
billion in long-term tax-exempt securities were issued, a decline of
over 50% compared to the November 30, 1993 quarter. Similarly, for
the six months ended November 30, 1994, only $75 billion in
municipal securities were underwritten, a decline of over 50%
compared to the comparable period a year earlier. This reduction in
issuance in recent quarters has allowed the municipal bond market to
react to both the decline in investor demand and the rise in fixed-
income yields in a more orderly fashion than in similar situations
in the past, particularly during 1987.
<PAGE>
Long-term tax-exempt revenue bonds currently yield approximately 7%,
or almost 11.5% on an after-tax equivalent basis, to an investor in
the 39.6% Federal income tax bracket. As inflation has only
marginally increased in the past year, real tax-exempt interest
rates have risen dramatically. The Federal Reserve Board appears
committed to maintaining inflation at or below its current levels.
Indeed, most forecasts expect inflation to remain in its present
range of 3%--4% throughout 1995 and, potentially, for the remainder
of the 1990s. Real after-tax equivalent interest rates exceeding 7%
represent historically attractive municipal investments for long-
term investors.
Federal Reserve Board actions taken thus far have yet to fully
impact US domestic growth, and expected additional actions should
promote only a modest economic expansion within a benign
inflationary context beginning sometime early in 1995. Within such
an environment, it is unlikely that tax-exempt interest rates will
remain at their current attractive levels. Tax-exempt bond issuance
is unlikely to return to the historic high levels seen in 1992 and
1993, while investor demand should return as markets stabilize. As
we have discussed in earlier reports, the total number of tax-exempt
bonds outstanding is scheduled to decline dramatically throughout
1994 and into 1995 as a result of both regular bond maturities and
early redemptions. Investors seeking tax-advantaged issues are
likely to find it very difficult to obtain currently available tax-
exempt yields, as the current supply/demand balance is unlikely to
be maintained in the coming quarters.
Portfolio Strategy
Despite comparatively low levels of new issuance for California
municipal bonds, the November quarter witnessed the most volatile
marketplace for these securities in recent history. Mutual fund
redemptions combined with high secondary market positions held by
dealers led to a degree of illiquidity whereby prices of securities
traded down on relatively low volume. Portfolio strategies employed
during these periods involved the sale of lower-coupon holdings that
have greater price sensitivity to market moves. We systematically
reinvested proceeds in current coupon issues in order to implement a
more neutral strategy. High-coupon securities also provide a boost
to the current return generated by the portfolio mix. The tight
technical condition of low primary supply combined with the
anticipated effect ahead of coupon reinvestment has prevented us
from raising larger cash equivalent reserves. In fact, cash levels
only have been increased during stretches of increased investor
redemptions. As always, credit quality remains a primary focus, with
approximately 70% of total assets rated AA or better by one of the
major rating services.
<PAGE>
Investment Update
On December 6, 1994, Orange County, California filed for bankruptcy
under Chapter 9 of the Federal bankruptcy code in response to losses
stemming from a portfolio strategy involving leveraging its assets
and the investment in longer maturity and less-liquid derivative
securities. As of December 21, 1994, the Fund owned bonds issued by
municipalities or other issuers within Orange County; however, each
of these bonds has municipal bond insurance issued by a Aaa/AAA
rated insurance company guaranteeing timely payment of interest and
principal. The percentage of the Fund's total assets falling into
the category of enhanced (insured) Orange County-related obligations
is approximately 5.4%. The Fund's municipal research group of the
Investment Adviser has scrutinized each holding in the portfolio and
analyzed possible negative repercussions from credit-related fallout
from Orange County. We want to stress that we do not expect Merrill
Lynch California Municipal Bond Fund to be weakened in terms of the
credit quality of its holdings despite Orange County's financial
crisis. Although the Fund is not insulated from general market
movements, we are extremely confident that our emphasis on the high
credit quality of the Fund's portfolio mix has put us in a strong
position to weather the current storm. Naturally, we will be closely
monitoring the situation for any new developments that could impact
the California municipal bond marketplace.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch California
Municipal Bond Fund, and we look forward to serving your investment
needs and objectives.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
December 21, 1994
<PAGE>
OFFICERS AND TRUSTEES
Arthur Zeikel, President and Trustee
Kenneth S. Axelson, 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
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
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 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.
<PAGE>
* 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" and "Average Annual Total
Return" tables on pages 3 and 4. Data for all of the Fund's shares,
including Class C Shares and Class D Shares, are presented in the
"Recent Performance Results" table.
The "Recent Performance Results" table on page 5 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 November
30, 1994 and for Class C and Class D Shares for the period since
inception through November 30, 1994. 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/94 -3.91% -7.75%
Five Years Ended 9/30/94 +7.17 +6.30
Inception (10/25/88)
through 9/30/94 +7.39 +6.66
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/94 -4.40% -7.93%
Five Years Ended 9/30/94 +6.64 +6.64
Inception (9/30/85) through 9/30/94 +8.07 +8.07
<PAGE>
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred 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
1/1/94--11/30/94 12.13 10.42 -- 0.586 - 9.30
------ ------
Total $0.314 Total $4.616
Cumulative total return as of 11/30/94: +45.44%**
<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>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <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
1/1/94--11/30/94 12.13 10.42 -- 0.536 - 9.74
------ ------
Total $0.360 Total $6.518
Cumulative total return as of 11/30/94: +91.32%**
<PAGE>
<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
11/30/94 8/31/94++ 11/30/93 % Change % Change++
<C> <C> <C> <C> <C> <C>
Class A Shares* $10.42 $11.32 $12.20 -13.48%(1) - 7.95%
Class B Shares* 10.42 11.32 12.20 -13.48(1) - 7.95
Class C Shares* 10.42 10.94 -- -- - 4.75
Class D Shares* 10.42 10.94 -- -- - 4.75
Class A Shares--Total Return* - 7.25(2) - 6.48(3)
Class B Shares--Total Return* - 7.75(4) - 6.55(5)
Class C Shares--Total Return* -- - 4.22(6)
Class D Shares--Total Return* -- - 4.08(7)
Class A Shares--Standardized 30-day Yield 6.10%
Class B Shares--Standardized 30-day Yield 5.85%
Class C Shares--Standardized 30-day Yield 5.75%
Class D Shares--Standardized 30-day Yield 6.01%
<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 $0.158 per share capital
gains distributions.
(2)Percent change includes reinvestment of $0.786 per share ordinary
income dividends and $0.158 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.165 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.728 per share ordinary
income dividends and $0.158 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.151 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.047 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.052 per share ordinary
income dividends.
</TABLE>
<PAGE>
PORTFOLIO COMPOSITION
For the Quarter Ended November 30, 1994
Distribution by Market Sector*
Other Revenue Bonds 39.8%
General Obligations & Tax Revenue Bonds 35.6
Prerefunded Bonds** 16.3
Utility Revenue Bonds 8.3
------
Total 100.0%
======
Net assets as of November 30, 1994 were $689,208,117.
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX,
GRAPHIC AND IMAGE MATERIAL, ITEM 1.
APPENDIX:GRAPHIC AND IMAGE MATERIAL.
ITEM 1:
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 54%
AA/Aa 12%
A/A 15%
BBB/Baa 8%
Other++ 2%
NR++++ 9%
[FN]
*Based on total market value of the portfolio as of November 30, 1994.
++Temporary investments in short-term municipal securities.
++++Not Rated.
<PAGE>
