Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), Massachusetts Financial Services Company
Marshall N. Cohan(1)
Private Investor
Lawrence H. Cohn, M.D.(2)
Chief of Cardiac Surgery,
Brigham and Women's Hospital;
Professor of Surgery, Harvard
Medical School
The Hon. Sir J. David
Gibbons, KBE(2)
Chief Executive Officer,
Edmund Gibbons Ltd.;
Chairman, Bank of N.T.
Butterfield & Son Ltd.
Abby M. O'Neill(2)
Private Investor; Director,
Rockefeller Financial Services, Inc.
(Investment Advisers)
Walter E. Robb, III(1)
President and Treasurer,
Benchmark Advisors, Inc.
(Corporate Financial Consultants)
Arnold D. Scott*
Senior Executive Vice President
and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames*
President, Massachusetts Financial
Services Company
J. Dale Sherratt(1)
President, Insight Resources, Inc.
(Acquisition Planning Specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Portfolio Managers
Stephen C. Bryant*
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar and Dividend
Disbursing Agent
MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Auditors
Deloitte & Touche LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
*Affiliated with the Investment Adviser
(1)Member of Audit Committee
(2)Member of Portfolio Trading Committee MGFCE-3 7/95 73.5M MFS(R)
Government Markets Income Trust
<PAGE>
Dear Shareholders:
During the past six months, continued signs of slowing economic momentum and
the prospect that the Federal Reserve Board has concluded its monetary
tightening initiatives have created a more favorable environment for
fixed-income investors. Over this period, the net asset value of the Trust rose
from $6.90 per share on November 30, 1994 to $7.41 on May 31, 1995, while the
market price of the Trust on the New York Stock Exchange rose from $6.313 to
$6.625. For the period from November 30, 1994 through May 31, 1995, the Trust
achieved a total return of +9.00%. This return is based on the closing stock
market prices in effect on those dates and assumes the reinvestment of all
distributions paid during the period.
The share repurchase program which the Trustees approved last year remains an
active program and one which we believe has enhanced shareholder value.
U.S. Government Sector
The U.S. economy is entering a decelerating trend from its robust pace of 1994.
As evidence of a slowdown in the economy mounts, the fixed- income markets have
become convinced that the Federal Reserve is near the end of its monetary-
tightening initiatives. Yields on 30-year U.S. Treasury securities, which were
8.00% at the end of November 1994, declined to 6.65% at the end of May 1995.
Over the same period, the yield on the 5-year Treasury declined from 7.81% to
6.06%.
Our overall strategy during the first six months of this fiscal year has been
to increase the allocation to the U.S. government sector of the portfolio. We
have also increased the average maturity and interest rate sensitivity of the
portfolio in order to benefit from the opportunities for capital appreciation.
The securities currently held in the portfolio are a mixture of Treasury and
agency debentures, as well as mortgage-backed pass-through securities. The
price sensitivity of the portfolio is approximately equal to that of a
seven-year Treasury security.
Approximately 61% of this portion of the portfolio is allocated to Treasury and
agency debentures. The Treasuries have maturities of 3 years and 30 years,
as we believe these areas of the yield curve have the best yield and return
characteristics available from the Treasury market. The agency securities have
similar price characteristics to Treasuries, but yield between 20 to 80 basis
points (.20% to .80%) more than these issues (although principal value and
interest on Treasury securities are guaranteed by the U.S. government if held
to maturity). The other 39% of the U.S. government segment of the portfolio
is invested in mortgage-backed pass- through securities. The mortgage portion
has a very low price sensitivity and should be viewed more for its yield
characteristics than its potential for price appreciation. These issues
should not be overly sensitive to volatile prepayments if we continue to see
rates decline to the 1993 levels. We have avoided any allocation to the more
volatile mortgage-derivative securities, which we believe has helped the Trust
avoid the pitfalls of investing in those securities which were revealed so
dramatically during 1994.
International Sector
Coinciding with the Federal Reserve's decision to stop tightening monetary
policy early in 1995, all international bond markets have rallied this year.
The fear of strong world growth and runaway inflation that plagued most markets
in 1994 has given way to expectations of a much slower path of worldwide
economic recovery.
According to Salomon Brothers' World Government Bond Index, a market-value
weighted index which includes straight issue bonds from the complete universes
of 14 government sectors with remaining maturities of at least one year, as of
May 31, 1995, three of the top four bond markets in local currency terms were
in the dollar bloc. While the best performing market was Japan at 11.42%,
Australia (10.71%), the United States (10.35%), and Canada (10.07%) also did
extremely well. The Canadian and Australian markets are highly correlated to
the U.S. bond market, with both countries enjoying lower inflation and higher
1
<PAGE>
real (adjusted for inflation) interest rates than the U.S. The Trust has
maintained an overweighted position in Australia and a neutral position in
Canada. The weaker performing markets were Spain (5.18%) and Sweden (5.71%),
both of which were hampered by large budget deficits and political
uncertainties.
Within "core" Europe, economic growth is slowing, due primarily to a weak
consumer sector and strong deutsche mark, which is beginning to curtail export
demand. Consequently, our strategy in Europe has been to focus on the core
markets such as Germany and the Netherlands and, to a lesser extent, Denmark,
France, and the United Kingdom. With growth slowing and inflation stable to
declining, we expect an easing in monetary policy in Europe led by the German
Bundesbank. We believe there is good capital appreciation potential in these
core markets over the next six months. Meanwhile, the performance of the Trust
has been helped by reducing our position in Spain and generally avoiding Sweden
and Italy.
Another factor contributing to positive performance was our exposure to the
Japanese yen and European currencies, especially the deutsche mark. For the
year, both currencies have appreciated well over 10% versus the U.S. dollar.
Both Germany and Japan have lowered interest rates, in part to curtail the U.S.
dollar weakness, as well as to stimulate their own economic recoveries.
Surprisingly, these actions, combined with foreign central banks' support of
the dollar, have had only a minimal impact in bolstering the beleaguered
currency. Until the United States takes more positive steps to curtail huge
budget and current-account deficits, the portfolio will be structured to
benefit from a somewhat weaker U.S. dollar environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
(Signature of A. Keith Brodkin)
A. Keith Brodkin
Chairman and President
(Signature of Stephen C. Bryant and Steven E. Nothern)
Stephen C. Bryant and Steven E. Nothern
Portfolio Managers
June 23, 1995
2
<PAGE>
Number of Shareholders
As of May 31, 1995, our records indicate that there are 16,422 registered
shareholders and approximately 48,600 shareholders owning Trust shares in
"street" name, such as through brokers, banks and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the Trust, please write or
call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
Number of Employees
The Trust is organized as a Massachusetts business trust and is registered
under the Investment Company Act of 1940, as amended, as a closed-end,
non-diversified, management investment company and has no employees.
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MGF.
Performance Summary
(For the period ended May 31, 1995)
Net Asset Value Per Share
November 30, 1994 $6.90
May 31, 1995 $7.41
New York Stock Exchange
Price
November 30, 1994 $6.313
May 8, 1995 (high)* $6.625
December 23, 1994 (low)* $6.000
May 31, 1995 $6.625
*For the period December 1, 1994
through May 31, 1995.
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Trust hereby gives notice that it may from time to time repurchase shares of
the Trust in the open market at the option of the Board of Trustees and on such
terms as the Trustees shall determine.
Dividend Reinvestment and
Cash Purchase Plan
The Trust offers a Dividend Reinvestment and Cash Purchase Plan which allows
you to reinvest either all of the distributions or only the long-term capital
gains paid by the Trust. Unless the shares are trading at a premium (exceeding
net asset value), purchases are made at the market price. Otherwise, purchases
will be made at a discounted price of either the net asset value or 95% of the
market price, whichever is greater. You can also buy shares of the Trust.
Investments from $100 to $500 can be made in January and July on the 15th of
the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank or other nominee, you
can ask the firm or nominee to participate in the Plan on your behalf. If the
nominee does not offer the Plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the Trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. A service fee of $0.75 is
charged for each cash purchase as well as a pro rata share of the brokerage
commissions, if any. The automatic reinvestment of distributions does not
relieve you of any income tax that may be payable (or required to be withheld)
on the distributions.
To enroll in or withdraw from the Plan or to receive a brochure providing a
complete description of the Plan, please contact the Plan agent at the address
and telephone number located on the back cover of this report. Please have
available the name of the Trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. When you withdraw from the Plan, you can receive
the value of the reinvested shares in one of two ways: a check for the value of
the full and fractional shares, or a certificate for the full shares and a
check for the fractional shares.
3
<PAGE>
Portfolio of Investments -- May 31, 1995
Bonds -- 98.8%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C> <C>
U.S. Bonds -- 73.3%
U.S. Federal Agencies -- 26.2%
FHA (Kimberly Woods Project Loan), 8.25s, 2027+ $ 6,322 $ 6,773,832
FHA (USGI 986 Spring Hill), 10.375s, 2030+ 2,473 2,551,542
Federal Home Loan Mortgage Corp., 7s, 1999 10,581 10,716,730
Federal Home Loan Mortgage Corp., 8.61s, 2004 30,000 30,932,700
Federal National Mortgage Assn., 7.5s, 2002 16,950 17,278,580
Federal National Mortgage Assn., 7.8s, 2002 15,000 15,349,200
Federal National Mortgage Assn., 8.5s, 2005 20,000 21,556,200
Federal National Mortgage Assn., 7s, 2023 8,227 2,622,469
Federal National Mortgage Assn., 9.5s, 2024 22,672 23,727,615
Financing Corp., 0s, 2014 10,153 2,550,840
Financing Corp., 0s, 2015 35,647 8,172,940
Financing Corp., 10.7s, 2017 8,500 11,878,750
Financing Corp., 9.8s, 2018 5,000 6,482,050
Resolution Funding FBE Coupon Strips, 0s, 2023 10,100 1,406,829
-----------
$162,000,277
-----------
U.S. Government Guaranteed -- 47.1%
Government Aid Bonds -- 0.4%
Israel State U.S. Government Guaranteed Notes, 0s,
2023 $15,900 $ 2,162,400
-----------
Government National Mortgage Association -- 20.0%
GNMA, 7s, 2022 - 2025 $42,766 $ 42,084,192
GNMA, 7.5s, 2023 24 23,984
GNMA, 8s, 2009 761 785,342
GNMA, 8.5s, 2022 - 2024 899 933,312
GNMA, 9s, 2015 - 2025 52,463 55,004,011
GNMA, 9.5s, 2019 - 2025 6,933 7,314,430
GNMA, 10.5s, 2020 9,452 10,346,492
GNMA, 11s, 2021 6,631 7,335,018
-----------
$123,826,781
-----------
Small Business Administration -- 0.8%
SBA, 8.875s, 2011 $ 4,612 $ 5,091,775
-----------
U.S. Treasury Obligations -- 25.9%
U.S. Treasury Notes, 8.75s, 1997 $35,000 $ 37,165,450
U.S. Treasury Notes, 8.25s, 1998 20,600 21,926,022
U.S. Treasury Notes, 6.25s, 2000 5,500 5,542,955
U.S. Treasury Notes, 6.5s, 2005 7,500 7,614,825
U.S. Treasury Bonds, 8.75s, 2020 55,000 67,778,700
U.S. Treasury Bonds, 7.625s, 2025 17,500 19,671,050
-----------
$159,699,002
-----------
Total U.S. Government Guaranteed $290,779,958
-----------
Total U.S. Bonds $452,780,235
-----------
Foreign Bonds -- 25.5%
Australia -- 5.3%
Australian Government, 8.75s, 2001 AUD 5,300 $ 3,853,748
Australian Government, 12s, 2001 12,000 10,066,188
Australian Government, 10s, 2002 15,450 11,855,685
Western Australian Treasury, 9s, 1999 9,250 6,795,665
-----------
$ 32,571,286
-----------
4
<PAGE>
Bonds -- continued
Foreign Bonds -- continued
Canada -- 2.2%
Canada Government, 8.5s, 2000 CAD 5,500 $ 4,173,355
Canada Government, 9.75s, 2001 12,000 9,670,217
-----------
$ 13,843,572
-----------
Denmark -- 3.7%
Kingdom of Denmark, 9s, 1998 DKK 50,460 $ 9,590,353
Kingdom of Denmark, 6s, 1999 38,000 6,533,606
Kingdom of Denmark, 9s, 2000 35,860 6,868,785
-----------
$ 22,992,744
-----------
France -- 1.2%
Government of France, 8s, 1998 FRF 13,580 $ 2,823,863
Government of France, 7s, 1999 14,010 2,828,549
Government of France, 7.75s, 2000 9,440 1,959,173
-----------
$ 7,611,585
-----------
Germany -- 4.2%
Deutschland Republic, 8.5s, 2000 DEM 5,370 $ 4,191,868
Deutschland Republic, 6.5s, 2003 11,970 8,399,331
German Unity Fund, 8.5s, 2001 16,790 13,153,949
-----------
$ 25,745,148
-----------
Ireland -- 1.6%
Republic of Ireland, 8s, 2000 IEP 6,000 $ 9,622,799
-----------
Italy -- 0.9%
Republic of Italy, 9.5s, 1999 ITL 2,445,000 $ 1,378,580
Republic of Italy, 8.5s, 2004 7,535,000 3,746,787
Republic of Italy, 9.5s, 2005 1,210,000 637,523
-----------
$ 5,762,890
-----------
Netherlands -- 2.5%
Dutch State Loan, 6.25s, 1998 NLG 1,330 $ 860,182
Netherlands Government, 7.75s, 2005 5,850 3,966,761
Netherlands Government, 8.25s, 2007 14,880 10,405,265
-----------
$ 15,232,208
-----------
New Zealand -- 1.5%
Government of New Zealand, 8s, 1995 NZD 4,860 $ 3,213,970
Government of New Zealand, 9s, 1996 9,000 6,029,519
-----------
$ 9,243,489
-----------
Spain -- 0.7%
Government of Spain, 10.25s, 1998 ESP 550,000 $ 4,343,313
-----------
United Kingdom -- 1.7%
United Kingdom Gilts, 9s, 2000 GBP 3,350 $ 5,583,750
United Kingdom Treasury, 7s, 2001 3,400 5,168,292
-----------
$ 10,752,042
-----------
Total Foreign Bonds $157,721,076
-----------
Total Bonds (Identified Cost, $595,360,912) $610,501,311
-----------
</TABLE>
5
<PAGE>
Portfolio of Investments -- continued
Call Options Purchased -- 0.1%
<TABLE>
<CAPTION>
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
<S> <C> <C> <C>
Canadian Dollars/August/1.34 CAD 4,470 $ 7,358
Japanese Bonds/September/108.577 JPY 345,000 185,265
Japanese Bonds/September/108.284023 391,000 146,625
-----------
Total Call Options Purchased (Premiums Paid, $137,969) $ 339,248
-----------
Put Options Purchased -- 0.1%
Deutsche Marks/June/1.401 DEM 25,493 $ 247,742
Deutsche Marks/August/1.45 33,434 358,179
Deutsche Marks/British Pounds/July/2.29 8,987 33,673
U.S. Treasury Bond Future/September/1.0625 $ 400 6,250
-----------
Total Put Options Purchased (Premiums Paid, $1,116,066) $ 645,844
-----------
Total Investments (Identified Cost, $596,614,947) $611,486,403
-----------
Call Options Written -- (0.1)%
British Pounds/September/1.64 GBP 4,930 $ (45,528)
Deutsche Marks/August/1.38 DEM 31,820 (413,815)
Deutsche Marks/June/1.34 24,383 (933)
Deutsche Marks/British Pounds/July/2.1139 8,296 (4,393)
-----------
Total Call Options Written (Premiums Received, $558,160) $ (464,669)
-----------
Put Options Written
British Pounds/September/1.53 GBP 4,599 $ (44,838)
Canadian Dollars/August/1.373 CAD 4,580 (35,936)
Deutsche Marks/August/1.50 DEM 34,587 (160,356)
Japanese Bonds/September/108.284023 JPY 391,000 (29,614)
Portfolio of Investments -- continuedBonds -- continuedJapanese
Bonds/September/108.577 345,000 (16,331)
-----------
Total Put Options Written (Premiums Received, $437,473) $ (287,075)
-----------
Other Assets, Less Liabilities -- 1.1% $ 6,908,552
-----------
Net Assets -- 100.0% $617,643,211
===========
</TABLE>
+Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar.A list of abbreviations is shown below.
AUD = Australian Dollars
CAD = Canadian Dollars
CHF = Swiss Francs
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
FRF = French Francs
GBP = British Pounds
IEP = Irish Punts
ITL = Italian Lire
JPY = Japanese Yen
NLG = Dutch Guilders
NZD = New Zealand Dollars
See notes to financial statements
6
<PAGE>
Statement of Assets and Liabilities -- May 31, 1995
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $596,614,947) $611,486,403
Cash 143,248
Net receivable for forward foreign currency exchange contracts purchased 92,991
Net receivable for forward foreign currency exchange contracts 2,032,484
Receivable for investments sold 11,284,875
Interest receivable 10,854,016
Other assets 8,343
-----------
Total assets $635,902,360
-----------
Liabilities:
Payable to dividend disbursing agent $ 307,321
Payable for investments purchased 12,039,405
Payable for Trust shares reacquired 48,975
Written options outstanding, at value (premiums received, $995,633) 751,333
Net payable for forward foreign currency exchange contracts sold 4,783,614
Payable to affiliates for shareholder servicing agent fee 24,500
Accrued expenses and other liabilities 304,001
-----------
Total liabilities $ 18,259,149
-----------
Net assets $617,643,211
===========
Net assets consist of:
Paid-in capital $642,256,232
Unrealized appreciation on investments and translation of assets and liabilities in foreign
currencies 12,532,442
Accumulated net realized loss on investments and foreign currency transactions (36,043,459)
Accumulated distributions in excess of net investment income (1,102,004)
-----------
Total $617,643,211
===========
Shares of beneficial interest outstanding 83,344,555
===========
Net asset value per share (net assets / shares of beneficial interest outstanding) $7.41
=====
</TABLE>
See notes to financial statements
7
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1995
<TABLE>
<S> <C>
Net investment income:
Interest income $24,609,043
----------
Expenses --
Management fee $ 2,286,097
Trustees' compensation 70,112
Transfer and dividend disbursing agent fee 145,354
Custodian fee 96,104
Postage 40,174
Auditing fees 37,750
Printing 15,619
Legal fees 8,725
Miscellaneous 270,620
----------
Total expenses $ 2,970,555
----------
Net investment income $21,638,488
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ (278,428)
Written option transactions 577,141
Foreign currency transactions (586,608)
Futures contracts 349,485
----------
Net realized gain on investments $ 61,590
----------
Change in unrealized appreciation (depreciation) --
Investments $40,299,373
Written options 367,584
Translation of assets and liabilities in foreign currencies (1,369,715)
----------
Net unrealized gain on investments $39,297,242
----------
Net realized and unrealized gain on investments and foreign
currency $39,358,832
----------
Increase in net assets from operations $60,997,320
==========
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (decrease) in net assets: Six Months Year Ended
Ended November 30,
May 31, 1995 1994
------------ --------------
<S> <C> <C>
From operations --
Net investment income $ 21,638,488 $ 44,947,604
Net realized gain (loss) on investments and foreign currency transactions 61,590 (73,606,300)
Net unrealized gain (loss) on investments and foreign currency
transactions 39,297,242 (13,123,884)
------------ --------------
Increase (decrease) in net assets from operations $ 60,997,320 $ (41,782,580)
------------ --------------
Distributions declared to shareholders --
From net investment income $(21,219,662) $ (13,290,258)
Tax return of capital -- (30,501,844)
From net realized gain on investments and foreign currency transactions -- (4,648,130)
In excess of net investment income -- (1,520,830)
------------ --------------
Total distributions declared to shareholders $(21,219,662) $ (49,961,062)
------------ --------------
Trust share (principal) transactions -- cost of Treasury shares acquired $(39,923,391) $ (34,915,018)
------------ --------------
Total decrease in net assets $
$ (145,733) (126,658,660)
Net assets:
At beginning of period 617,788,944 744,447,604
------------ --------------
At end of period (including distributions in excess of net investment
income of $1,102,004 and $1,520,830, respectively) $617,643,211 $ 617,788,944
============ ==============
</TABLE>
See notes to financial statements
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Highlights
Year Ended November 30,
----------------------------------------------------------------------------------
Six
Per share data (for a share Months
outstanding throughout Ended
each period): May 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987*
------- ----- ----- ----- ----- ----- ----- -----
Net asset value -- beginning
of period $ 6.90 $ 7.83 $ 7.59 $ 8.08 $ 8.41 $ 8.92 $ 9.18 $ 9.33 $ 9.40
------- ----- ----- ----- ----- ----- ----- ----- ------
Income from investment
operations++++ --
Net investment income $ 0.25 $ 0.48 $ 0.52 $ 0.61 $ 0.69 $ 0.78 $ 0.82 $ 0.94 $ 0.45
Net realized and unrealized
gain (loss) on investments 0.51 (0.88) 0.38 (0.23) 0.16 (0.11) 0.09 0.12 (0.03)
------- ----- ----- ----- ----- ----- ----- ----- ------
Total from investment
operations $ 0.76 $ (0.40) $ 0.90 $ 0.38 $ 0.85 $ 0.67 $ 0.91 $ 1.06 $ 0.42
------- ----- ----- ----- ----- ----- ----- ----- ------
Less distributions declared
to shareholders --
From net investment income $ (0.25) $ (0.14) $ (0.44) $ (0.57) $ (0.64) $ (0.68) $ (0.90) $ (0.88) $ (0.44)
In excess of net investmentincome -- (0.02) -- -- -- -- -- -- --
From net realized gain on
investments -- (0.05) (0.22) -- -- -- -- (0.17) (0.05)
Tax return of capital -- (0.32) -- -- -- -- -- -- --
From paid-in capital -- -- -- (0.30) (0.54) (0.50) (0.27) (0.16) --
------- ----- ----- ----- ----- ----- ----- ----- ------
Total distributions
declared to shareholders $ (0.25) $ (0.53) $ (0.66) $ (0.87) $ (1.18) $ (1.18) $ (1.17) $ (1.21) $ (0.49)
------- ----- ----- ----- ----- ----- ----- ----- ------
Net asset value -- end of
period $ 7.41 $ 6.90 $ 7.83 $ 7.59 $ 8.08 $ 8.41 $ 8.92 $ 9.18 $ 9.33
======= ===== ===== ===== ===== ===== ===== ===== ======
Per share market value --
end of period $ 6.625 $ 6.313 $ 7.125 $ 7.250 $ 8.000 $ 8.125 $ 10.000 $ 10.125 $ 9.875
======= ===== ===== ===== ===== ===== ===== ===== ======
Total return 9.00%+++ (3.90)% 7.32% 1.11% 13.73% (6.82)% 11.83% 15.77% 8.10%+
======= ===== ===== ===== ===== ===== ===== ===== ======
Ratios (to average net assets)/Supplemental data:
Expenses 0.98%+ 0.97% 0.93% 1.03% 1.04% 1.05%# 1.08% 1.11% 1.01%+
Net investment income 7.12%+ 6.51% 6.61% 7.80% 8.38% 9.16%# 9.23% 9.87% 9.91%+
Portfolio turnover 169% 295% 453% 245% 805% 535% 640% 307% 88%
Net assets at end of period
(000 omitted) $617,643 $617,789 $744,448 $743,103 $785,992 $813,978 $857,252 $873,503 $879,686
</TABLE>
* For the period from the commencement of investment operations, May 28, 1987
to November 30, 1987.
+ Annualized.
+++ Not annualized.
++++ Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
# The investment adviser did not impose a portion of its adviser fee amounting
to $0.0013 per share for the year ended November 30, 1990. If this fee had been
incurred by the Trust, the ratio of expenses to average net assets and net
investment income to average net assets would have been 1.07% and 9.14%,
respectively.
See notes to financial statements
10
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Government Markets Income Trust (the Trust) is organized as a Massachusetts
business trust and is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company.
(2) Significant Accounting Policies
Investment Valuations -- Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Non-U.S. dollar denominated short- term obligations
are valued at amortized cost as calculated in the base currency and translated
into U.S. dollars at the closing daily exchange rate. Futures contracts,
options and options on futures contracts listed on commodities exchanges are
valued at closing settlement prices. Over-the-counter options are valued by
brokers through the use of a pricing model which takes into account closing
bond valuations, implied volatility and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued at fair value
as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements -- The Trust may enter into repurchase agreements with
institutions that the Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Trust requires
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Trust to obtain those securities
in the event of a default under the repurchase agreement. The Trust monitors,
on a daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each repurchase
agreement is greater than amounts owed to the Trust under each such repurchase
agreement.
Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
and losses. That portion of both realized and unrealized gains and losses on
investments that results from fluctuations in foreign currency exchange rates
is not separately disclosed.
Written Options -- The Trust may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Trust. The Trust, as writer of an option, may have no
control over whether the underlying security may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium
11
<PAGE>
Notes to Financial Statements -- continued
received. Written options may also be used as a part of an income producing
strategy reflecting the view of the Trust's management on the direction of
interest rates.
Futures Contracts -- The Trust may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Trust is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Trust
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized
gains or losses by the Trust. The Trust's investment in futures contracts is
designed to hedge against anticipated future changes in interest or exchange
rates or securities prices. For example, interest rate futures may be used in
modifying the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest or exchange rates or securities prices move unexpectedly, the
Trust may not achieve the anticipated benefits of the futures contracts and
may realize a loss.
Security Loans -- The Trust may lend its securities to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange
or subsidiaries thereof. The loans are collateralized at all times
by cash or securities with a market value at least equal to the market value of
securities loaned. As with other extensions of credit, the Trust may bear the
risk of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of fees or from all or a portion of the
income from investment of the collateral. The Trust would also continue to earn
income on the securities loaned. At May 31, 1995, the Trust had no securities
on loan.
Forward Foreign Currency Exchange Contracts -- The Trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Trust will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Trust may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Trust may enter into
contracts with the intent of changing the relative exposure of the Trust's
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions -- The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Trust files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain
12
<PAGE>
reported on these financial statements may differ from that reported on the
Trust's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that reported
to shareholders on Form 1099-DIV.
Foreign taxes have been provided for on interest income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Trust distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
At November 30, 1994, the Trust, for federal income tax purposes, had a capital
loss carryforward of $38,053,572, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2002.
(3) Transactions with Affiliates
Investment Adviser -- The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an effective annual rate of
0.32% of average daily net assets and 5.33% of investment income, amounted to
$2,286,097.
The Trust pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the officers
and Trustees of the Trust are officers or directors of MFS and MFS Service
Center, Inc. (MFSC). The Trust has an unfunded defined benefit plan for all its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a
net periodic pension expense of $18,112 for the six months ended May 31, 1995.
Transfer and Dividend Disbursing Agent -- MFSC acts as registrar and dividend
disbursing agent for the Trust under an agreement which provides that the Trust
will pay MFSC an account maintenance fee and a dividend services fee and will
reimburse MFSC for reasonable out-of-pocket expenses. The account maintenance
fee is computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Total Number of Accounts Annual Account Fee
- --------------------------- -------------------
Less than 75,000 ............. $9.00
75,000 and over .............. $8.00
</TABLE>
The dividend services fee is $0.75 per dividend reinvestment and $0.75 per cash
infusion.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- -------------------------------------------- ----------- -------------
<S> <C> <C>
U.S. government securities $872,039,644 $898,882,280
========= ===========
Investments (non-U.S. government securities) $145,511,433 $142,257,162
========= ===========
</TABLE>
13
<PAGE>
Notes to Financial Statements -- continued
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Trust, as computed on a federal income tax basis,
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate cost $596,614,947
===========
Gross unrealized appreciation $ 18,215,420
Gross unrealized depreciation (3,343,964)
-----------
Net unrealized appreciation $ 14,871,456
===========
</TABLE>
(5) Shares of Beneficial Interest
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended May 31, 1995 Year Ended November 30, 1994
------------------------------ --------------------------------
Shares Amount Shares Amount
- -------------------- ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares reacquired 6,207,600 $39,923,391 5,496,100 $34,915,018
========== ============ ============ =============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 6,207,600 shares
of beneficial interest were purchased by the Trust during the six months ended
May 31, 1995 at an average price per share of $6.30 and a weighted average
discount of 8.6% per share. During the year ended November 30, 1994, 5,496,100
shares of beneficial interest were purchased by the Trust at an average price
per share of $6.35 and a weighted average discount from net asset value of 8.8%
per share.
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Net Realized and Net Increase (Decrease)
Net Investment Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Investment Income Income on Investments from Operations
- ----------------- ------------------ ------------------ ---------------------- ------------------------
Per Per Per Per
Fiscal 1995 Amount Share Amount Share Amount Share Amount Share
- ----------------- ---------- ---- ---------- ---- ------------ ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
February 28, 1995 $12,162,338 $0.13 $10,700,322 $0.12 $ 13,491,579 $ 0.25 $ 24,191,901 $ 0.37
May 31, 1995 12,446,705 0.15 10,938,166 0.13 25,867,253 0.26 36,805,419 0.39
-------- -- -------- -- ---------- ---- ---------- ------
$24,609,043 $0.28 $21,638,488 $0.25 $ 39,358,832 $ 0.51 $ 60,997,320 $ 0.76
======== == ======== == ========== ==== ========== ======
Fiscal 1994
- -----------------
February 28, 1994
$10,479,948 $0.11 $8,867,636 $0.09 $(15,186,319) $(0.15) $ (6,318,683) $(0.06)
May 31, 1994 14,319,848 0.15 12,618,191 0.14 (44,851,111) (0.45) (32,232,920) (0.31)
August 31, 1994 13,459,407 0.14 11,854,632 0.12 (13,730,483) (0.14) (1,875,851) (0.02)
November 30, 1994 13,376,874 0.15 11,607,145 0.13 (12,962,271) (0.14) (1,355,126) (0.01)
-------- -- -------- -- ---------- ---- ---------- ------
$51,636,077 $0.55 $44,947,604 $0.48 $(86,730,184) $(0.88) $(41,782,580) $(0.40)
======== == ======== == ========== ==== ========== ======
Fiscal 1993
- -----------------
February 28, 1993
$16,035,262 $0.16 $14,136,479 $0.14 $26,275,933 $ 0.27 $ 40,412,412 $ 0.41
May 31, 1993 13,231,238 0.15 11,538,905 0.13 6,030,770 0.06 17,569,675 0.19
August 31, 1993 14,567,469 0.15 12,713,382 0.13 20,069,492 0.21 32,782,874 0.34
November 30, 1993 13,822,393 0.13 12,160,049 0.12 (16,243,340) (0.16) (4,083,291) (0.04)
-------- -- -------- -- ---------- ---- ---------- ------
$57,656,362 $0.59 $50,548,815 $0.52 $ 36,132,855 $ 0.38 $ 86,681,670 $ 0.90
======== == ======== == ========== ==== ========== ======
</TABLE>
14
<PAGE>
(7) Line of Credit
The Trust entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Trust shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Trust for the six months ended May
31, 1995 was $4,514.
(8) Financial Instruments
The Trust trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts and futures contracts. The notional or contractual amounts
of these instruments represent the investment the Trust has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered. A summary of obligations under these financial instruments at May
31, 1995, is as follows:
Written Option Transactions
<TABLE>
<CAPTION>
1995 Calls 1995 Puts
------------------------------------- ---------------------------------------
Principal Amounts of Principal Amounts of
Contracts (000 Omitted) Premiums Contracts (000 Omitted) Premiums
------------------------------------------- ------------------------ --------- -------------------------- ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period --
Australian Dollars $
6,063 $ 42,445 -- --
Canadian Dollars -- -- 4,876 25,442
Deutsche Marks -- -- 29,035 161,926
Japanese Yen/Deutsche Marks -- -- 2,288,737 275,623
Swiss Francs/Deutsche Marks 8,961 37,729 -- --
Options written --
Australian Dollars 3,107 23,702 6,982 80,679
British Pounds 4,930 85,065 4,599 85,065
Canadian Dollars -- -- 10,229 42,101
Deutsche Marks 104,711 798,312 51,091 377,160
Deutsche Marks/British Pounds 8,296 53,870 -- --
Finnish Markkaa/Deutsche Marks -- -- 20,841 15,244
Japanese Yen -- -- 3,639,379 190,949
Spanish Pesetas/Deutsche Marks -- -- 450,973 29,554
U.S. Dollars 7,455 38,440 -- --
Options terminated in closing transactions
--
Australian Dollars (9,170) (66,147) (6,982) (80,679)
Canadian Dollars -- -- (10,525) (44,272)
Deutsche Marks (26,034) (223,575) (45,539) (324,647)
Japanese Yen -- -- (2,903,379) (76,251)
Japanese Yen/Deutsche Marks -- -- (2,288,737) (275,623)
Spanish Pesetas/Deutsche Marks -- -- (450,973) (29,554)
Options exercised --
Swiss Francs/Deutsche Marks (8,961) (37,729) -- --
U.S. Dollars (7,455) (38,440) -- --
15
<PAGE>
1995 Calls 1995 Puts
------------------- ------------------
Principal Amounts of Principal Amounts of
Contracts (000 Omitted) Premiums Contracts (000 Omitted) Premiums
Outstanding, beginning of period --
Deutsche Marks (22,474) $(155,512) -- $ --
Finnish Markkaa/Deutsche Marks -- -- (20,841) (15,244)
------ -------- -------- --------
Outstanding, end of period 69,429 $ 558,160 779,766 $437,473
====== ======= ======== ========
Options outstanding at end of period
consist of --
British Pounds 4,930 $ 85,065 4,599 $ 85,065
====== ======= ======== ========
Canadian Dollars -- -- 4,580 $ 23,271
======= ======= ======== ========
Deutsche Marks 56,203 $ 419,225 34,587 $214,439
======= ======= ======== ========
Deutsche Marks/British Pounds 8,296 $ 53,870 -- --
======= ======= ======== ========
Japanese Yen -- $ -- 736,000 $114,698
======= ======= ======== ========
</TABLE>
At May 31, 1995, the Trust had sufficient cash and/or securities at least equal
to the value of the written options.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts at Appreciation
Settlement Date Deliver/Receive Value In Exchange for (Depreciation)
- ---------- ---------------- ---------------------- ------------------- ---------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 6/09/95 -
9/01/95 AUD 37,047,538 $ 26,604,033 $ 27,358,090 $ 754,057
6/09/95 -
7/07/95 CAD 5,739,968 4,184,122 4,086,480 (97,642)
7/12/95 -
7/19/95 CHF 8,414,076 7,247,202 7,323,051 75,849
6/06/95 -
8/30/95 DEM 126,803,096 89,971,395 88,869,411 (1,101,984)
6/08/95 DKK 119,386,221 21,632,664 21,987,223 354,559
6/21/95 -
7/05/95 ESP 1,008,628,315 8,232,380 7,740,903 (491,477)
7/19/95 -
8/02/95 FRF 35,087,379 7,056,403 7,186,871 130,468
6/09/95 -
7/07/95 GBP 7,528,154 11,936,787 11,909,706 (27,081)
8/04/95 IEP 5,692,373 9,213,305 9,278,568 65,263
9/11/95 ITL 9,604,015,744 5,791,222 5,805,557 14,335
7/07/95 -
8/25/95 JPY 3,397,677,688 40,456,833 36,325,186 (4,131,647)
6/26/95 NLG 17,786,058 11,268,215 11,464,844 196,629
6/09/95 -
11/15/95 NZD 39,064,564 25,876,301 25,351,358 (524,943)
----------------- -------------- ----------------------
$269,470,862 $264,687,248 $(4,783,614)
================= ============== ======================
Purchases 7/05/95 -
8/25/95 AUD 8,829,437 $ 6,331,105 $ 6,579,181 $ (248,076)
7/07/95 CAD 2,869,400 2,090,441 2,034,934 55,507
7/12/95 CHF 8,143,979 7,011,999 7,250,565 (238,566)
6/06/95 -
8/17/95 DEM 210,903,481 149,632,034 150,823,626 (1,191,592)
7/05/95 ESP 407,842,244 3,326,361 3,178,981 147,380
6/09/95 -
7/07/95 GBP 6,514,655 10,330,318 10,417,937 (87,619)
6/16/95 -
8/01/95 JPY 2,330,162,938 27,744,143 26,618,215 1,125,928
6/26/95 NLG 1,248,565 791,018 793,445 (2,427)
6/09/95 -
11/15/95 NZD 35,432,236 23,464,741 22,932,285 532,456
----------------- -------------- ----------------------
$230,722,160 $230,629,169 $ 92,991
================= ============== ======================
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $2,032,484 at May 31, 1995.
At May 31, 1995, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
16
<PAGE>
(9) Restricted Securities
The Trust may invest not more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 1995,
the Trust owned the following restricted securities (constituting 1.47% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Trust does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers. Certain of these
securities may be offered and sold to "qualified institutional buyers" under
Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Par
Description Acquisition Amount Cost Value
- ------------------------------------------------- ---------- -------- --------- -----------
<S> <C> <C> <C> <C>
FHA (Kimberly Woods Project Loan), 8.25s, 2027 3/29/93 6,321,703 $6,511,354 $6,773,832
FHA (USGI 986 Spring Hill), 10.375s, 2030 8/16/93 2,472,712 2,659,711 2,551,542
---------
$9,325,374
=========
</TABLE>
17
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of MFS Government Markets Income Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Markets Income Trust as of May
31, 1995, the related statement of operations for the six months then ended,
the statement of changes in net assets for the six months then ended and the
year ended November 30, 1994, and the financial highlights for the six months
ended May 31, 1995 and for each of the years in the eight-year period ended
November 30, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at May
31, 1995 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Markets Income Trust at May 31, 1995, the results of its operations,
the changes in its net assets, and its financial highlights for the respective
stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 30, 1995
18
