MERRILL LYNCH
INTERMEDIATE
GOVERNMENT
BOND FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Quarterly Report
July 31, 1999
<PAGE>
Merrill Lynch Intermediate Government Bond Fund
DEAR SHAREHOLDER
Interest rates continued to rise during the July quarter. The yield on the
Treasury's ten-year note jumped from about 5.35% at the start of the July
quarter to above 6% and closed the quarter at 5.90%, near its highest level of
the year.
The threat of an economy that was expanding too quickly sparked worries about
inflation. The tight labor market was beginning to create an imbalance between
the supply and demand for available workers, which could eventually lead to
higher wages and then higher prices. The unemployment rate fell close to 4%, a
rate not seen in decades. However, despite the long-term decline in the
unemployment rate, inflation rates have remained low, partly because of
improvements in worker productivity, which have been spurred by advances in
technology and communications. It is uncertain as to how long this productivity
improvement can continue to offset the very low unemployment levels without
causing inflation.
News overseas also added to the bearish market environment for bonds. The
strength of the US dollar faltered as foreign economies recovered from the
turmoil of last year. As their local economies recover, foreign manufacturers no
longer need to sell to the United States at depressed prices just to keep
operating. The US economy has begun to lose this deflationary benefit. The
weakening of the dollar has lessened the benefit to foreign investors of
investing in US dollar-denominated assets, lowering the demand for US Treasury
securities.
In response to these developments, the Federal Open Market Committee (FOMC)
announced its bias to tighten monetary policy at its May 1999 meeting. In June,
the FOMC tightened monetary policy 25 basis points (0.25%). This provided only
temporary relief as concerns about the labor supply and demand balance and the
level of inflation remained. (The FOMC tightened monetary policy an additional
25 basis points at the end of August.) With tighter Federal Reserve Board policy
(and many other concerns such as Year 2000 compliance and heavy debt issuance by
corporations), assets such as mortgage-backed securities, Government agency
debentures and corporate bonds underperformed their Treasury counterparts during
the July quarter.
The three months ended July 31, 1999 marked a period of transition for the Fund.
Most notably, while the average portfolio maturity of the Fund continues to be
between six and eight years, our 15-year final maturity restriction on
investments was eliminated. This now gives us the flexibility to invest in
Government securities of any maturity.
We maintained a balance in the Fund's allocation to Treasury issues, agency
securities and mortgage-backed securities throughout the July quarter, taking a
market-weighted position in mortgage-backed securities and emphasizing positions
in Government agency debentures at the expense of Treasury securities. This bias
hurt relative performance as yield spreads (the difference in yield between a
security and its Treasury equivalent) widened during the July quarter, causing
Treasury issues to outperform. Fortunately, we were overweighted in the shorter
maturity agency issues, which perform better than longer agency issues in a
spread widening environment. As of July 31, 1999, the Fund had no agency
investments longer than 13 years, excluding mortgage-backed securities. The
Fund's Class A, Class B, Class C and Class D Shares had total returns of -2.04%,
- -2.16%, -2.10% and -2.06%, respectively, for the three months ended July 31,
1999. This compared to the Lipper Analytical Services Inc.'s peer group of
Intermediate US Government Bond Funds, which had an average of
1
<PAGE>
Merrill Lynch Intermediate Government Bond Fund July 31, 1999
- -1.64% for the same three-month period. However, for the 12 months ended July
31, 1999, the Fund's Class A, Class B, Class C and Class D Shares had total
returns of +2.31%, +1.69%, +1.93% and +2.21%, respectively, exceeding the Lipper
group average of +1.74%. (Fund results shown do not reflect sales charges and
would be lower if sales charges were included. Complete performance information
can be found on pages 3 and 4 of this report to shareholders.)
We believe that the current high yield levels available on agency debentures and
mortgage-backed securities are attractive. Over long periods of time, agency
debentures tend to perform better than Treasury debt given their yield advantage
and very similar credit quality. Therefore, we plan to continue to overweight
the portfolio in agency debentures. We also believe that the Federal Reserve
Board may continue to tighten monetary policy in the environment of a shrinking
labor supply. However, we also believe that the extent of its tightening will be
limited, as the sharply higher interest rates we have seen may slow down the
economy enough to provide a sense of balance later this year.
In Conclusion
We thank you for your continued investment in Merrill Lynch Intermediate
Government Bond Fund, and we look forward to discussing our outlook and strategy
with you in our upcoming annual report to shareholders.
Sincerely,
/s/ Robert W. Crook
Robert W. Crook
President and Trustee
/s/ Ralph A. DeCesare
Ralph A. DeCesare
Vice President and Portfolio Manager
September 13, 1999
2
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Merrill Lynch Intermediate Government Bond Fund July 31, 1999
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
o 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.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 1% if redeemed during the first year, decreasing to 0% after the first
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. (There is no
initial sales charge for automatic share conversions.)
o Class C Shares are subject to a distribution fee of 0.25% 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.
o Class D Shares incur a maximum initial sales charge of 1% and an account
maintenance fee of 0.10% (but no distribution fee). The Fund's
shareholders as of February 18, 1997 became holders of Class D Shares.
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.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 7/31/99
==================================================================================================================
<S> <C> <C> <C> <C>
ML Intermediate Government Bond Fund Class A Shares +2.31% -2.04% +12.49% 5.52%
- ------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class B Shares +1.69 -2.16 +11.25 5.08
- ------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class C Shares +1.93 -2.10 +11.47 5.34
- ------------------------------------------------------------------------------------------------------------------
ML Intermediate Government Bond Fund Class D Shares +2.21 -2.06 +86.68+ 5.41
==================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results 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 Fund's ten-year/since inception periods are
from 2/18/97 for Class A, Class B & Class C Shares and ten years for Class
D Shares.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
3
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Merrill Lynch Intermediate Government Bond Fund July 31, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 6/30/99 +3.02% +1.99%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 6/30/99 +5.31 +4.86
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/99 +2.39% +1.42%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 6/30/99 +4.84 +4.84
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Year Ended 6/30/99 +2.64% +1.67%
- --------------------------------------------------------------------------------
Inception (2/18/97)
through 6/30/99 +4.92 +4.92
- --------------------------------------------------------------------------------
* 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 6/30/99 +2.81% +1.78%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/99+ +5.69 +5.48
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/99+ +6.67 +6.56
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
+ Performance for Class D Shares for the period prior to 2/18/97 was when
the Fund operated under a different investment objective.
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
- -----------------------------------------------------------------------------------------------------
US Government & Agency Obligations--96.6%
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Notes & Bonds $1,000,000 5.625% 5/15/08 $ 971,560
250,000 5.75 10/31/02 249,610
1,500,000 5.75 8/15/03 1,492,740
6,000,000 6.125 11/15/27 5,878,140
2,000,000 7.25 5/15/04 2,109,380
1,000,000 7.50 5/15/02 1,044,370
4,000,000 7.50 11/15/16 4,460,640
2,000,000 7.875 8/15/01 2,083,120
1,000,000 10.00 5/15/10 1,182,340
2,000,000 11.875 11/15/03 2,437,820
2,100,000 13.375 8/15/01 2,405,151
=====================================================================================================
Federal Home Loan Banks 3,000,000 5.125 2/26/02 2,928,270
5,000,000 5.50 8/13/01 4,955,450
4,000,000 5.63 9/02/03 3,885,000
=====================================================================================================
</TABLE>
4
<PAGE>
Merrill Lynch Intermediate Government Bond Fund July 31, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Interest Maturity
Issue Amount Rate Date(s) Value
- -----------------------------------------------------------------------------------------------------
US Government & Agency Obligations (concluded)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $2,989,257 6.50% 5/01/14-6/01/14 $2,921,999
Mortgage-Backed Securities** 8,999,100 6.50 7/01/29 8,577,222
2,000,000 7.00 1/15/24 1,988,740
4,000,000 7.00 TBA+ 3,910,000
=====================================================================================================
Federal National Mortgage Association 2,000,000 5.43 3/29/01 1,982,500
3,000,000 5.81 3/02/04 2,913,750
4,000,000 5.94 12/19/08 3,697,480
2,000,000 6.95 11/13/06 1,970,320
3,950,000 6.96 9/05/12 3,886,445
2,000,000 7.15 8/27/12 1,934,680
=====================================================================================================
Federal National Mortgage Association 5,779,311 6.50 10/25/03-3/01/14 5,662,325
Mortgage-Backed Securities** 91,512 7.00 6/01/06 91,334
3,887,616 7.00 5/01/29-6/01/29 3,798,900
6,828,937 7.50 11/01/26-3/01/29 6,831,176
=====================================================================================================
Government National Mortgage Association 7,958,510 7.00 6/15/23-6/15/29 7,757,505
Mortgage-Backed Securities**
=====================================================================================================
Total US Government & Agency Obligations
(Cost--$96,882,872) 94,007,967
=====================================================================================================
<CAPTION>
Face Amount Short-Term Securities
- -----------------------------------------------------------------------------------------------------
US Government Agency Obligations*--2.1%
- -----------------------------------------------------------------------------------------------------
$2,000,000 Student Loan Marketing Association, 4.92% due 8/02/1999 2,000,000
=====================================================================================================
Total US Government Agency Obligations (Cost--$2,000,000) 2,000,000
- -----------------------------------------------------------------------------------------------------
Repurchase Agreements***--4.3%
- -----------------------------------------------------------------------------------------------------
4,211,000 Warburg Dillon Read LLC, purchased on 7/30/1999 to yield 5.05% to 8/02/1999 4,211,000
=====================================================================================================
Total Repurchase Agreements (Cost--$4,211,000) 4,211,000
=====================================================================================================
Total Short-Term Securities (Cost--$6,211,000)--6.4% 6,211,000
=====================================================================================================
Total Investments (Cost--$103,093,872)--103.0% 100,218,967
Liabilities in Excess of Other Assets--(3.0%) (2,939,875)
------------
Net Assets--100.0% $ 97,279,092
============
=====================================================================================================
Net Asset Class A--Based on net assets of $23,610,024 and
Value: 2,506,271 shares of beneficial interest outstanding $ 9.42
============
Class B--Based on net assets of $39,941,861 and
4,240,120 shares of beneficial interest outstanding $ 9.42
============
Class C--Based on net assets of $4,071,324 and
432,510 shares of beneficial interest outstanding $ 9.41
============
Class D--Based on net assets of $29,655,883 and
3,148,419 shares of beneficial interest outstanding $ 9.42
============
=====================================================================================================
</TABLE>
* Certain US Government Agency Obligations are traded on a discount basis;
the interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
** Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage investments. As
a result, the average life may be substantially less than the original
maturity.
*** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
+ Represents a "to-be-announced" (TBA) transaction. The Fund has committed
to purchasing securities for which all specific information is not
available at this time.
5
<PAGE>
Officers and Trustees
Robert W. Crook, President and Trustee
A. Bruce Brackenridge, Trustee
Charles C. Cabot Jr., Trustee
James T. Flynn, Trustee
Terry K. Glenn, Trustee
Todd Goodwin, Trustee
George W. Holbrook Jr., Trustee
W. Carl Kester, Trustee
Christopher G. Ayoub, Senior Vice President
Michael J. Brady, Senior Vice President
William M. Breen, Senior Vice President
James J. Fatseas, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
William Wasel, Senior Vice President
Ann Catlin, Vice President
Ralph A. DeCesare, Vice President
Diana Frankland, Vice President
Mark E. Maguire, Vice President
Dianne F. McDonough, Vice President
Patricia A. Schena, Vice President
Barry F. X. Smith, Vice President
Karen D. Young, Vice President
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Intermediate Government
Bond Fund
Box 9011
Princeton, NJ
08543-9011 #IGB01--7/99
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