MERRILL LYNCH
MUNICIPAL
INTERMEDIATE
TERM FUND
FUND LOGO
Quarterly Report
January 31, 1995
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.
<PAGE>
Merrill Lynch
Municipal
Intermediate
Term Fund
Merrill Lynch
Municipal Series Trust
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
Officers and
Trustees
Arthur Zeikel, President and Trustee
Ronald W. Forbes, Trustee
Cynthia A. Montgomery, Trustee
Charles C. Reilly, Trustee
Kevin A. Ryan, Trustee
Richard R. West, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Fredrick K. Stuebe, Vice President
Gerald M. Richard, Treasurer
Susan B. Baker, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
TO OUR SHAREHOLDERS
The combination of heightened inflationary concerns, anticipation of
further tightening of monetary policy by the Federal Reserve Board
and the turmoil of the Mexican currency crisis all exerted negative
influences on the US financial markets during the January quarter.
On the positive side, increasing signs that the US economy may be
losing momentum suggested that most of the interest rate increases
for this economic cycle may be behind us. As a result of these
economic crosscurrents, the US stock and bond markets continued to
be volatile during the period.
The manufacturing sector proved to be the driving force behind the
US economy through the final quarter of 1994, making an important
contribution to the substantial increase in corporate earnings. US
companies have been successful at containing labor costs, which are
an important component of the inflation outlook. Growth in the
economy has not been translated into higher wages and benefits for
US workers. Consumer spending is growing at a slower pace than in
previous economic recoveries, but households are nonetheless
spending more than saving, as the personal savings rate fell to an
all-time annual low in 1994.
In the weeks ahead, investors will continue to assess economic data
and inflationary trends in order to gauge whether further increases
in short-term interest rates are likely as 1995 unfolds. Despite the
widespread concerns about rising prices for raw materials and
incipient inflationary pressures, 1994's inflation results were as
positive as those in 1993, creating the best sustained inflation
performance in 30 years. However, it is not likely that such
positive inflation results will be duplicated in 1995. Investors
will also focus on the progress that the new Congress makes on both
reducing spending and the Federal budget deficit and passing tax
cuts that promote savings and investment. Legislative progress,
combined with continued indications of moderate and sustainable
levels of economic growth, would be positive for the US capital
markets. However, the lagged effects of higher interest rates could
slow the economy sharply and with it, the growth of corporate
profits.
The Municipal Market
The municipal bond market continued to exhibit considerable interest
rate volatility during the three months ended January 31, 1995.
Yields on A-rated municipal revenue bonds continued to rise
throughout November to a high of 7.37% as measured by the Bond Buyer
Revenue Bond Index. The tax-exempt bond market improved dramatically
for the remainder of the quarter, and yields fell by approximately
60 basis points (0.60%) to a four-month low of 6.78%. However, the
Index failed to capture much of the rally that occurred at the end
of January as market yields declined a further ten basis points into
the 6.65% range. Municipal bond prices have now recaptured most of
their declines of the last six months.
<PAGE>
This improvement in municipal bond prices during the January quarter
was largely the result of significant positive change in investor
sentiment. The series of interest rate increases engineered during
1994 and those widely anticipated in the first half of 1995 have
gone a long way in confirming the Federal Reserve Board's anti-
inflationary resolve. Additionally, the recent signs of a weakening
domestic economy, as well as the negative near-term impact of the
Kobe earthquake and Mexican currency situation, have allowed
investors to become more comfortable with the concept that the vast
majority of the recent rise in fixed-income rates has already
occurred and that yields during 1995 are more likely to remain
stable or decline than they are to significantly rise again.
Consequently, current yield levels are being viewed as attractive to
long-term investors.
In addition to this more positive outlook, the ongoing strong
technical position of the municipal bond market has only fostered
the increase in tax-exempt bond prices seen in recent months. Over
$25 billion in bond proceeds became available to investors at year-
end 1994 from bond maturities, coupon payments and early
redemptions. However, during the recent January quarter, new bond
issuance was less than $25 billion, down 50% from the January 1994
quarter. In January 1995, less than $7 billion in long-term
municipal securities were issued, making this past January's
issuance the lowest monthly total since the mid 1980s. Investor
demand has easily surpassed supply, causing bond prices to rise
rapidly. Also, as 1995 annual issuance is expected to be below the
recent historically low 1994 levels, this positive technical
environment should continue to support the recent improvements in
municipal bond prices into the coming quarters.
Portfolio Strategy
Although the municipal bond market began the January quarter on a
negative note (yields on ten-year general obligation bonds reached
their highest levels of the bear market cycle in mid-November), we
began to change the composition of Merrill Lynch Municipal
Intermediate Term Fund during the period. Concerns of further
monetary policy tightening by the Federal Reserve Board and a
stronger-than-expected economy in the fourth quarter of 1994
prompted us to reduce the average portfolio maturity and raise cash
reserves to approximately 20% at the outset of the January quarter.
However, the larger-than-expected increase in interest rates by the
Federal Reserve Board of 75 basis points in both the Federal Funds
rate and the discount rate created a market sell-off and subsequent
higher interest rates for intermediate-term and longer-term
municipal bonds.
However, these higher yields represented excellent value in what
appeared to be a market that had overreacted. For example, yields on
AA-rated ten-year general obligation bonds traded at yields which
were approximately 85% of comparable US Treasury notes, which to an
investor in the 39% marginal tax bracket represented an equivalent
yield of over 10.25%, providing an excellent value on a historical
basis.
<PAGE>
By January quarter-end, we had reduced our cash position and
extended the average portfolio maturity from approximately 7.5 years
to over 11 years. This was done both to take advantage of these
historically attractive yields and in anticipation of the reduced
supply of municipal bonds available to investors in 1995. By quarter-
end, we had reduced our cash reserve position to approximately 2%
of net assets as investments were concentrated in the longer end of
the yield curve to try to capture the full effect of any drop in
yields that might occur. We anticipate maintaining this strategy in
the near future as we look for signs that the economy may be slowing
in response to the Federal Reserve Board's aggressive tightening of
monetary policy in 1994.
In Conclusion
We thank you for your support of Merrill Lynch Municipal
Intermediate Term Fund, and we look forward to serving your
investment needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President and
Portfolio Manager
February 21, 1995
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:
<PAGE>
*Class A Shares incur a maximum initial sales charge (front-end
load) of 1% 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 1% if redeemed during the first year, decreasing 1%
thereafter to 0% after the first year. In addition, Class B Shares
are subject to a distribution fee of 0.10% and an account
maintenance fee of 0.20%. These shares automatically convert to
Class D Shares after approximately 10 years.
*Class C Shares are subject to a distribution fee of 0.10% and an
account maintenance fee of 0.20%. 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 1% and an
account maintenance fee of 0.10% (but no distribution fee).
Performance data for the Fund's Class A and Class B Shares are
presented in the "Performance Summary", "Recent Performance Results"
and "Average Annual Total Return" tables on pages 4, 5 and 6. Data
for Class C and Class D Shares are also presented in the "Recent
Performance Results" and "Aggregate Total Return" tables on pages 4,
5 and 6.
The "Recent Performance Results" table on page 6 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 January
31, 1995 and for Class C and Class D Shares for the since inception
and 3-month periods ended January 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.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/94 -3.69% -4.65%
Five Years Ended 12/31/94 +6.25 +6.03
Inception (10/31/88) through 12/31/94 +6.28 +6.11
<PAGE>
[FN]
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/94 -3.99% -4.90%
Five Years Ended 12/31/94 +5.92 +5.92
Inception (11/26/86) through 12/31/94 +5.23 +5.23
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**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 12/31/94 -0.89% -1.87%
[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*
Inception (10/21/94) through 12/31/94 -0.81% -1.80%
[FN]
*Maximum sales charge is 1%.
**Assuming maximum sales charge.
<TABLE>
Performance
Summary--
Class A Shares
<CAPTION>
<PAGE>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/31/88--12/31/88 $ 9.45 $ 9.29 -- $0.117 - 0.45%
1989 9.29 9.41 -- 0.606 + 8.07
1990 9.41 9.31 -- 0.594 + 5.45
1991 9.31 9.73 -- 0.597 +11.28
1992 9.73 9.89 -- 0.582 + 7.88
1993 9.89 10.42 -- 0.538 +11.04
1994 10.42 9.52 -- 0.521 - 3.69
1/1/95--1/31/95 9.52 9.65 -- 0.031 + 1.80
------
Total $3.586
Cumulative total return as of 1/31/95: +48.26%**
<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>
11/26/86--12/31/86 $10.00 $ 9.94 -- $0.030 - 0.10%
1987 9.94 9.27 -- 0.579 - 1.09
1988 9.27 9.29 -- 0.564 + 6.43
1989 9.29 9.41 -- 0.577 + 7.74
1990 9.41 9.31 -- 0.566 + 5.14
1991 9.31 9.73 -- 0.568 +10.94
1992 9.73 9.89 -- 0.552 + 7.55
1993 9.89 10.42 -- 0.507 +10.71
1994 10.42 9.52 -- 0.490 - 3.99
1/1/95--1/31/95 9.52 9.65 -- 0.029 + 1.78
------
Total $4.462
Cumulative total return as of 1/31/95: +53.77%**
<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
1/31/95 10/31/94 1/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.65 $9.62 $10.51 -8.18% +0.31%
Class B Shares* 9.65 9.62 10.51 -8.18 +0.31
Class C Shares* 9.65 9.62 9.70 -0.52 +0.31
Class D Shares* 9.65 9.62 9.70 -0.52 +0.31
Class A Shares--Total Return* -3.19(1) +1.71(2)
Class B Shares--Total Return* -3.49(3) +1.63(4)
Class C Shares--Total Return* +0.88(5) +1.60(6)
Class D Shares--Total Return* +0.96(7) +1.68(8)
Class A Shares--Standardized 30-day Yield 5.00%
Class B Shares--Standardized 30-day Yield 4.74%
Class C Shares--Standardized 30-day Yield 4.76%
Class D Shares--Standardized 30-day Yield 4.90%
<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 $0.519 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.132 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.489 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.124 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.122 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.121 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.131 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.129 per share ordinary
income dividends.
</TABLE>
<PAGE>
PORTFOLIO COMPOSITION
For the Quarter Ended January 31, 1995
Top Ten States*
Texas 14.01%
Illinois 11.60
Washington 9.95
Colorado 6.64
New York 4.96
Georgia 4.80
Florida 4.71
Maine 3.47
Virginia 3.37
Michigan 3.25
-------
Total Top Ten 66.76
Total Others 33.24
-------
Total Portfolio 100.00%
=======
Net assets as of January 31, 1995 were $157,729,450.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 39%
AA/Aa 28%
A/A 27%
NR+++ 1%
Other++ 5%
[FN]
*Based on total market value of the portfolio as of
January 31, 1995.
++Temporary investments in short-term municipal securities.
+++Not Rated.
