[MFS Logo] Investment Management
MFS(r) Government Markets Income Trust
Semiannual Report
May 31, 1997
[Graphic Man & Woman]
<PAGE>
Dear Shareholders:
The central theme for the past six months has been strong U.S. economic growth.
In the first quarter of 1997, the nation's gross domestic product grew at an
annualized rate of 5.8% (following a 3.8% increase in the last quarter of
1996), while the unemployment rate dropped to a 23-year low of 4.8%. The
Federal Reserve Board (the Fed) demonstrated its determination to check
inflation by hiking interest rates. Accordingly, the U.S. bond market turned in
a lackluster performance, while the dollar soared. The 10-year U.S. Treasury
yield rose by 60 basis points (0.60%), while the dollar appreciated from 1.5339
to 1.7016 German marks per dollar.
Economic growth has been much less robust outside the United States. Fiscal
austerity and structural rigidities continue to constrain growth in Europe,
while Japan's private sector is struggling to overcome the deflationary impact
of deregulation and fiscal tightening. As a consequence, 10-year yields in
Germany and Japan rose only modestly over the period, by 14 and 17 basis points
(0.14% and 0.17%), respectively. Meanwhile, the higher-yielding markets of
Spain and Italy, driven by anticipation of European monetary union in 1999 as
well as by global investors' efforts to maintain portfolio yield, continued to
experience narrowing yield spreads versus Germany. As in past periods, our
ability to allocate up to 35% of the Trust's assets to international
fixed-income markets enhanced return and diversified the risk in the U.S.
government market.
The Trust's stock market price, which stood at $6.750 on November 30, 1996,
declined to $6.563 on May 31, 1997, while its net-asset-value (NAV) price
decreased from $7.56 to $7.36, representing a total return of 1.14% based on
market price and 1.28% based on NAV. For comparative purposes, the Salomon
Brothers Treasury Government Sponsored Index, an unmanaged index of medium-term
Treasuries and agency securities, appreciated by 0.47% over this period, and
the J.P. Morgan Non-Dollar Government Bond Index, an unmanaged index of
actively traded government bonds issued from 12 countries (excluding the United
States) with remaining maturities of at least one year, appreciated by 2.14% in
local currency terms.
We believe the Trust continues to benefit from its innovative share repurchase
program. This program, which was implemented in April 1996 and reinstated in
March 1997, authorizes the Trust to repurchase up to 10% of its outstanding
shares annually. The Trust captures the difference between its NAV and its
market price when it repurchases shares and pays the added value to its
shareholders with their regular monthly distributions. The extra distribution
paid to shareholders is currently adding approximately 50 basis points (0.50%)
to the Trust's distribution rate at both NAV and market price. This higher
distribution rate has helped move the Trust's market price from $6.500 on May
31, 1996, to $6.563 on May 31, 1997.
U.S. Government Sector
With the backdrop of an economy operating near its long-term growth potential,
the U.S. fixed-income market has vacillated between opposing themes. The first
has been concern that, seven years into this business expansion, and with the
economy operating near what is commonly viewed as full employment, inflationary
pressures could be building. The second has been the belief that, by some
measures, inflationary pressures have actually been abating. Stronger momentum
in the economy during the second half of 1996 and early in 1997 led the Fed and
the fixed-income market to focus on inflationary risks, pushing yields on 2-
and 10-year Treasuries from 5.58% and 6.05%, respectively, in November to highs
of 6.54% and 6.98% in April. In anticipation of the March tightening of
monetary policy, our strategy was to de-emphasize intermediate-maturity
Treasuries and increase allocations to very short-maturity Treasuries, offset
by a slightly greater emphasis on longer-maturity 10-year Treasuries. Although
the degree of further Fed tightening over the next several months remains
1
<PAGE>
uncertain, we believe the Fed may see a need for further modest tightening.
Should it choose to raise interest rates, short- and intermediate-maturity
securities would be the most adversely affected. By repositioning our Treasury
exposure between cash and longer maturities, we believe we can reduce overall
interest-rate sensitivity in the portfolio while reducing exposure to
intermediate maturities.
In this environment, the mortgage-backed pass-through sector posted strong
relative performance, and we anticipate a continuation of this trend in the
months ahead. Mortgage securities tend to outperform Treasuries in uncertain
market environments for two important reasons. First, they are, on average,
shorter in maturity than outstanding Treasuries and, thus, decline less in
price as yields increase, as they did during 1996 and early 1997. Second,
because they are higher-yielding securities, their additional coupon income
provides a total return cushion to help offset price declines. (Principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity.) An index, or average, allocation to this sector would be
about 42%. We recently reduced our weighting of this sector to approximately
36%, but will add to it should yield spreads widen during the next few months.
International Sector
In 1996, we maintained the Trust's exposure to foreign markets near the limit
of 35%, enabling the portfolio to capture the strong performance of the
higher-yielding Canadian, Australian, and European markets. More recently, the
foreign allocation has been reduced because U.S. interest rates appear
increasingly attractive from a global perspective. Presently, 26% of assets are
allocated to foreign bonds, with 10% invested in the dollar bloc, 8% in
higher-yielding European bonds, and 8% in emerging market instruments offering
what we view as attractive yields with low duration.
With the Fed tightening in the United States and yield spreads already narrow
by historical standards, we do not anticipate rapid price appreciation in
international bond markets. Therefore, our focus is on earning an attractive
yield from a high-quality portfolio and on capturing potential gains from the
convergence of longer-term yields. Within the dollar bloc, we remain
concentrated in Australian and New Zealand bonds based on their having
relatively high nominal interest rates as well as high real
(inflation-adjusted) rates. In Europe, we believe that European monetary union
will begin on time in 1999. This should help maintain downward pressure on
yield spreads throughout Europe -- even for countries such as Italy that may
not participate right away. As part of the convergence process, official
interest rates are likely to be cut in Italy, Spain, and possibly Sweden. Over
time, we would also expect emerging market spreads to shrink as investors
become more comfortable with these markets.
Although some of the forces pushing the dollar up may be waning, we remain
virtually fully hedged back into the dollar. In the near term, we believe the
dollar should be supported by capital inflows induced by favorable
interest-rate and growth differentials. Long term, however, concern over
worsening trade and current-account deficits may temper this strength.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ Stephen C. Bryant
Stephen C. Bryant
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Managers
June 12, 1997
2
<PAGE>
Performance Summary
(For the six months ended May 31, 1997)
Net Asset Value Per Share
November 30, 1996 $7.56
May 31, 1997 $7.36
New York Stock Exchange Price
November 30, 1996 $6.750
December 31, 1996 (high)* $6.813
April 15, 1997 (low)* $6.375
May 31, 1997 $6.563
*For the period December 1, 1996, through May 31, 1997.
----------------
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.
Number of Shareholders
As of May 31, 1997, our records indicate that there are 12,107 registered
shareholders and approximately 48,600 shareholders owning Trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
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,
nondiversified, management investment company and has no employees.
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MGF.
Investment Objective and Policy
The investment objective of MFS(R) Government Markets Income Trust is to
provide a high level of current income.
The Trust will attempt to achieve this objective by investing at least 65% of
its assets in U.S. government securities and by engaging in transactions
involving related options. The Trust may invest up to 35% of its total assets
in foreign government securities. In pursuing its objective, the Trust will
consider the preservation of capital by balancing the yields of various
fixed-income securities against their attendant risks. However, the Trust will
not purchase securities with the goal of achieving capital appreciation.
For defensive purposes, the Trust may invest in cash (including foreign
currency) and cash equivalents. The Trust may also enter into options and
futures transactions and forward foreign currency exchange contracts, interest
rate swaps, and purchase securities on a "when issued" basis.
3
<PAGE>
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 Dividend Disbursing 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.
4
<PAGE>
Portfolio of Investments -- May 31, 1997
Bonds -- 88.9%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C> <C>
U.S. Bonds -- 63.4%
U.S. Federal Agencies -- 25.5%
FHA (Kimberly Woods Project Loan), 8.25s, 2027+ ......... $ 6,240 $ 6,486,180
FHA (USGI 986 Spring Hill), 10.375s, 2030+ ............ 2,457 2,725,146
FICO, 10.7s, 2017 ....................................... 8,500 11,633,015
FICO, 9.8s, 2018 ....................................... 5,000 6,362,500
Federal Home Loan Mortgage Corp., 7.5s, 2099 ............ 36,000 35,921,160
Federal National Mortgage Assn., 7.875s, 2006 ......... 30,000 30,295,312
Federal National Mortgage Assn., 7s, 2026 -- 2027 ...... 31,425 29,173,160
Federal National Mortgage Assn., 8.5s, 2027 ............ 10,100 10,840,141
-------------
$133,436,614
-------------
U.S. Government Guaranteed -- 16.7%
Small Business Administration -- 0.8%
SBA, 8.875s, 2011 .................................... $ 3,876 $ 4,138,352
-------------
Government National Mortgage Association -- 15.9%
GNMA, 7s, 2022 -- 2025 ................................. $ 41,387 $ 40,373,582
GNMA, 7.5s, 2002 -- 2026 .............................. 28,326 28,415,653
GNMA, 8.5s, 2026 ....................................... 14,212 14,718,573
-------------
Total Government National Mortgage Association ...... $ 83,507,808
-------------
Total U.S. Government Guaranteed ..................... $ 87,646,160
-------------
U.S. Treasury Obligations -- 21.2%
U.S. Treasury Notes, 9.125s, 1999 ..................... $ 15,000 $ 15,792,150
U.S Treasury Notes, 6.375s, 2000 ..................... 35,000 35,016,450
U.S. Treasury Bonds, 10.75s, 2005 ..................... 9,100 11,413,402
U.S. Treasury Bonds, 11.25s, 2015 ..................... 28,500 40,946,520
U.S. Treasury Bonds, 6.625s, 2027 ..................... 7,910 7,620,811
-------------
$110,789,333
-------------
Total U.S. Bonds .................................... $331,872,107
-------------
Foreign Bonds -- 25.5%
Australia -- 7.1%
Commonwealth of Australia, 8.75s, 2001 .................. AUD 10,860 $ 8,855,372
Commonwealth of Australia, 9.75s, 2002 .................. 9,870 8,401,135
Commonwealth of Australia, 10s, 2002 .................. 9,880 8,533,705
Commonwealth of Australia, 9.5s, 2003 .................. 13,400 11,390,499
-------------
$ 37,180,711
-------------
Denmark -- 0.8%
Kingdom of Denmark, 8s, 2001 ........................... DKK 24,639 $ 4,213,972
-------------
Greece -- 1.4%
Hellenic Republic, 12.6s, 2003 ........................ GRD 1,240,000 $ 4,797,064
Hellenic Republic, 14.3s, 2003 ........................ 360,000 1,378,161
Hellenic Republic, 14.5s, 2003 ........................ 240,000 918,334
-------------
$ 7,093,559
-------------
Ireland -- 1.6%
Republic of Ireland, 8s, 2000 ........................... IEP 4,620 $ 7,393,112
Republic of Ireland, 6.5s, 2001 ........................ 640 984,774
-------------
$ 8,377,886
-------------
Italy -- 1.0%
Republic of Italy, 8.313s, 1999 ........................ ITL 8,430,000 $ 5,199,664
-------------
</TABLE>
5
<PAGE>
Portfolio of Investments -- continued
Bonds -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C> <C>
Foreign Bonds -- continued
Mexico -- 3.7%
United Mexican States, 7.875s, 2001## .............................. $ 13,000 $ 13,097,500
United Mexican States, 7.875s, 2001 .............................. 6,000 6,043,800
--------------
$ 19,141,300
--------------
New Zealand -- 1.4%
Government of New Zealand, 8s, 2001 .............................. NZD 10,440 $ 7,367,932
--------------
Poland -- 2.8%
Government of Poland, 6.938s, 2024 ................................. $ 15,000 $ 14,681,250
--------------
Sweden -- 0.9%
Kingdom of Sweden, 10.25s, 2000 .................................... SEK 33,100 $ 4,809,635
--------------
Thailand -- 1.5%
Total Access Communication, 10.4s, 2004 ........................... THB 200,000 $ 7,951,319
--------------
United Kingdom -- 2.2%
United Kingdom Treasury, 9.5s, 2004 .............................. GBP 6,200 $ 11,496,933
--------------
Venezuela -- 1.1%
Republic of Venezuela, 6.5s, 2020 ................................. $ 7,500 $ 5,709,375
--------------
Total Foreign Bonds ............................................. $133,223,536
--------------
Total Bonds (Identified Cost, $465,986,475) ..................... $465,095,643
--------------
Warrants
Republic of Venezuela ............................................. $ 37,500 --
--------------
Rights
United Mexican States ............................................. $ 1,000 --
--------------
Short-Term Obligations -- 13.6%
Federal Home Loan Mortgage Corp., due 06/02/97 - 06/30/97 ......... $ 55,032 $ 54,982,763
Federal National Mortgage Assn., due 08/04/97 - 08/05/97 ......... 16,400 16,238,067
--------------
Total Short-Term Obligations, at Amortized Cost and Value ...... $ 71,220,830
--------------
Total Investments (Identified Cost, $537,207,305) ............... $536,316,473
--------------
Call Option Written -- (0.1%)
Principal Amount
Description/Expiration Month/Strike Price of Contracts
Swiss Francs/Deutsche Marks/ (000 Omitted)
March/0.847 (Premium Received, $133,083)........................... CHF 19,084 (550,279)
--------------
Other Assets, Less Liabilities -- (2.4%) .......................................... (12,468,643)
--------------
Net Assets -- 100.0% ............................................................ $523,297,551
--------------
##SEC Rule 144A restriction.
+Restricted security.
</TABLE>
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 ESP = Spanish Pesetas JPY = Japanese Yen
CAD = Canadian Dollars GBP = British Pounds NOK = Norwegian Kroner
CHF = Swiss Francs GRD = Greek Drachmas NZD = New Zealand Dollars
DEM = Deutsche Marks IEP = Irish Punts SEK = Swedish Kronor
DKK = Danish Kroner ITL = Italian Lire THB = Thai Bahts
ECU = European Currency Units
See notes to financial statements
6
<PAGE>
Statement of Assets and Liabilities -- May 31, 1997
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $537,207,305) .............................. $536,316,473
Cash .............................................................................. 78,008
Net receivable for forward foreign currency exchange contracts ..................... 359,180
Net receivable for master netting agreements and closed foreign currency exchange
contracts sold ................................................................... 2,583,470
Receivable for investments sold ................................................... 15,000,000
Interest receivable ............................................................... 6,344,305
Other assets ..................................................................... 4,753
--------------
Total assets ................................................................. $560,686,189
--------------
Liabilities:
Payable to dividend disbursing agent ............................................. $ 258,898
Payable for investments purchased ................................................ 35,870,625
Payable for interest rate swaps ................................................... 80,509
Written option outstanding, at value (premium received, $133,083) .................. 550,279
Net payable for forward foreign currency exchange contracts purchased ............ 214,967
Payable to affiliates --
Administrative fee ............................................................... 429
Management fee .................................................................. 20,088
Transfer and dividend disbursing agent fee ....................................... 17,977
Accrued expenses and other liabilities ............................................. 374,866
--------------
Total liabilities .............................................................. $ 37,388,638
--------------
Net assets ........................................................................... $523,297,551
==============
Net assets consist of:
Paid-in capital .................................................................. $560,537,212
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies ............................................................... 1,278,451
Accumulated net realized loss on investments and foreign currency transactions ... (33,645,768)
Accumulated distributions in excess of net investment income ..................... (4,872,344)
--------------
Total ........................................................................... $523,297,551
==============
Shares of beneficial interest outstanding .......................................... 71,077,255
==============
Net asset value (net assets [divided by] shares of beneficial interest outstanding) $7.36
=====
</TABLE>
See notes to financial statements
7
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1997
<TABLE>
<S> <C>
Net investment income:
Interest income ......................................................... $ 19,805,148
--------------
Expenses --
Management fee ......................................................... $ 1,907,293
Transfer and dividend disbursing agent fee ........................... 105,304
Administrative fee ................................................... 20,031
Trustees' compensation ................................................ 81,584
Custodian fee ......................................................... 139,399
Auditing fees ......................................................... 35,957
Postage ............................................................... 27,459
Printing ............................................................... 13,877
Miscellaneous ......................................................... 76,021
--------------
Total expenses ...................................................... $ 2,406,925
Fees paid indirectly ................................................... (18,658)
--------------
Net expenses ......................................................... $ 2,388,267
--------------
Net investment income ............................................. $ 17,416,881
--------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis)
Investment transactions ................................................ $ (8,746,438)
Written option transactions .......................................... 204,943
Foreign currency transactions .......................................... 3,553,571
Interest rate swaps ................................................... 234,525
--------------
Net realized loss on investments and foreign currency transactions $ (4,753,399)
--------------
Change in unrealized appreciation (depreciation)
Investments ............................................................ $(12,341,271)
Written options ...................................................... (417,196)
Translation of assets and liabilities in foreign currencies ............ 4,339,902
Interest rate swaps ................................................... (666,821)
--------------
Net unrealized loss on investments and foreign currency translations $ (9,085,386)
--------------
Net realized and unrealized loss on investments and foreign currency $(13,838,785)
--------------
Increase in net assets from operations ........................... $ 3,578,096
==============
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Year Ended
Ended November 30,
May 31, 1997 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations --
Net investment income ...................................................... $ 17,416,881 $ 38,132,996
Net realized gain (loss) on investments and foreign currency transactions .. (4,753,399) 1,310,231
Net unrealized loss on investments and foreign currency translation ........ (9,085,386) (8,205,983)
------------- -------------
Increase in net assets from operations .................................... $ 3,578,096 $ 31,237,244
------------- -------------
Distributions declared to shareholders --
From net investment income ................................................ $(17,416,881) $(38,132,996)
In excess of net investment income ....................................... (1,836,427) (3,801,845)
------------- -------------
Total distributions declared to shareholders ........................... $(19,253,308) $(41,934,841)
------------- -------------
Trust share (principal) transactions --
Cost of Treasury shares acquired .......................................... $(15,523,255) $(40,941,119)
------------- -------------
Total decrease in net assets ............................................. $(31,198,467) $(51,638,716)
Net assets:
At beginning of period ................................................... 554,496,018 606,134,734
------------- -------------
At end of period (including accumulated distributions in excess of
net investment income of $4,872,344 and $3,035,917, respectively) ......... $523,297,551 $554,496,018
============= =============
</TABLE>
See notes to financial statements
9
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------------
Six Months Ended
May 31, 1997 1996 1995 1994 1993
------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ...... $ 7.56 $ 7.62 $ 6.90 $ 7.83 $ 7.59
------------------ -------- -------- -------- --------
Income from investment operations --
Net investment income # ..................... $ 0.24 $ 0.49 $ 0.49 $ 0.48 $ 0.52
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .............................. (0.19) (0.07) 0.64 (0.88) 0.38
------------------ -------- -------- -------- --------
Total from investment operations ......... $ 0.05 $ 0.42 $ 1.13 $ (0.40) $ 0.90
------------------ -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income .................. $ (0.24) $ (0.49) $ (0.49) $ (0.14) $ (0.44)
In excess of net investment income ......... (0.03) (0.05) -- (0.02) --
From net realized gain on investments
and foreign currency transactions ......... -- -- -- (0.05) (0.22)
Tax return of capital ..................... -- -- -- (0.32) --
------------------ -------- -------- -------- --------
Total distributions declared to
shareholders ........................... $ (0.27) $ (0.54) $ (0.49) $ (0.53) $ (0.66)
------------------ -------- -------- -------- --------
Net increase from repurchase of capital
shares .................................... $ 0.02 $ 0.06 $ 0.08 -- --
------------------ -------- -------- -------- --------
Net asset value -- end of period ............ $ 7.36 $ 7.56 $ 7.62 $ 6.90 $ 7.83
================== ======== ======== ======== ========
Per share market value -- end of
period .................................... $ 6.563 $ 6.750 $ 6.500 $ 6.313 $ 7.125
================== ======== ======== ======== ========
Total return ................................. 1.14%++ 12.61% 10.96% (3.90)% 7.32%
Ratios (to average net assets)/Supplemental data:
Expenses## ................................. 0.91%+ 1.00% 0.99% 0.97% 0.93%
Net investment income ..................... 6.58%+ 6.63% 6.84% 6.51% 6.61%
Portfolio turnover ........................... 140% 249% 318% 295% 453%
Net assets at end of period
(000 omitted) .............................. $523,298 $554,496 $606,135 $617,789 $744,448
</TABLE>
+Annualized.
++Not annualized.
#Per share data for periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Trust's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------
1992 1991 1990
-------- -------- --------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ....... $ 8.08 $ 8.41 $ 8.92
-------- -------- --------
Income from investment operations --
Net investment income[sec] $ 0.61 $ 0.69 $ 0.78
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .............................. (0.23) 0.16 (0.11)
-------- -------- --------
Total from investment operations ........ $ 0.38 $ 0.85 $ 0.67
-------- -------- --------
Less distributions declared to
shareholders --
From net investment income .................. $ (0.57) $ (0.64) $ (0.68)
From net realized gain on investments
and foreign currency transactions ......... -- -- --
From paid-in capital ........................ (0.30) (0.54) (0.50)
-------- -------- --------
Total distributions declared to
shareholders .......................... $ (0.87) $ (1.18) $ (1.18)
-------- -------- --------
Net asset value -- end of period ............. $ 7.59 $ 8.08 $ 8.41
======== ======== ========
Per share market value -- end of period ....... $ 7.250 $ 8.000 $ 8.125
======== ======== ========
Total return .................................. 1.11% 13.73% (6.82)%
Ratios (to average net assets)/
Supplemental data:[sec]
Expenses ................................ 1.03% 1.04% 1.05%
Net investment income .................... 7.80% 8.38% 9.16%
Portfolio turnover ............................ 245% 805% 535%
Net assets at end of period
(000 omitted) .............................. $743,103 $785,992 $813,978
<CAPTION>
1989 1988 1987*
-------- -------- -------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period ...... $ 9.18 $ 9.33 $ 9.40
-------- -------- -------------
Income from investment operations --
Net investment income[sec] $ 0.82 $ 0.94 $ 0.45
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .............................. 0.09 0.12 (0.03)
-------- -------- -------------
Total from investment operations ......... $ 0.91 $ 1.06 $ 0.42
-------- -------- -------------
Less distributions declared to
shareholders --
From net investment income .................. $ (0.90) $ (0.88) $ (0.44)
From net realized gain on investments
and foreign currency transactions ......... -- (0.17) (0.05)
From paid-in capital ........................ (0.27) (0.16) --
-------- -------- -------------
Total distributions declared to
shareholders ........................... $ (1.17) $ (1.21) $ (0.49)
-------- -------- -------------
Net asset value -- end of period ............ $ 8.92 $ 9.18 $ 9.33
======== ======== =============
Per share market value -- end of period . $ 10.000 $ 10.125 $ 9.875
======== ======== =============
Total return ................................. 11.83% 15.77% 8.10%+
Ratios (to average net assets)/
Supplemental data:[sec]
Expenses ................................. 1.08% 1.11% 1.01%+
Net investment income ..................... 9.23% 9.87% 9.91%+
Portfolio turnover ........................... 640% 307% 88%
Net assets at end of period
(000 omitted) .............................. $857,252 $873,503 $ 879,686
</TABLE>
*For the period from the commencement of investment operations, May 28, 1987,
to November 30, 1987.
+Annualized.
[sec]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 net investment income per share would
have been $0.78 and the annualized 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
11
<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 nondiversified, closed-end management investment company.
(2) Significant Accounting Policies
General -- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations -- Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, interest rate swaps,
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.
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. The Trust, along with other affiliated entities of Massachusetts
Financial Service Company (MFS), may utilize a joint trading account for the
purpose of entering into one or more repurchase agreements.
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, 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.
12
<PAGE>
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 securities 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 received. Written options
may also be used as part of an income-producing strategy reflecting the view of
the Trust's management on the direction of interest rates.
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 into 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.
Swap Agreements -- The Trust may enter into swap agreements. A swap is an
exchange of cash payments between the Trust and another party which is based on
a specific financial index. Cash payments are exchanged at specified intervals
and the expected income or expense is recorded on the accrual basis. The value
of the swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Trust uses swaps for both
hedging and non-hedging purposes. For hedging purposes, the Trust may use swaps
to reduce its exposure to interest and foreign exchange rate fluctuations. For
non-hedging purposes, the Trust may use swaps to take a position on anticipated
changes in the underlying financial index.
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.
Fees Paid Indirectly -- The Trust's custodian bank calculates its fee based on
the Trust's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Trust. This amount is shown as a reduction of expenses on the Statement of
Operations.
13
<PAGE>
Notes to Financial Statements -- continued
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 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 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 tax 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, 1996, the Trust, for federal income tax purposes, had a capital
loss carryforward of $28,773,975, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of it utilization or
expiration on November 30, 2002, ($28,577,312) and November 30, 2004,
($196,663).
(3) Transactions with Affiliates
Investment Adviser -- The Trust has an investment advisory agreement with MFS
to provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate of 0.32% of average daily net assets and 5.33% of investment
income.
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 $22,177 for the period ended May 31, 1997.
Administrator -- Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Trust pays
MFS an administrative fee up to 0.015% per annum of the Trust's average daily
net assets, provided that the administrative fee is not assessed on Trust
assets that exceed $3 billion.
Transfer Agent -- MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement 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>
Total Number of Accounts Annual Account Fee
------------------------ -------------------
<S> <C> <C>
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.
14
<PAGE>
(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> <C>
U.S. government securities ........................... $417,249,832 $457,243,692
============= =============
Investments (non-U.S. government securities) ...... $234,342,349 $231,099,017
============= =============
</TABLE>
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>
<S> <C> <C>
Aggregate cost ......................... $537,207,305
=============
Gross unrealized depreciation ............ $ (3,257,469)
Gross unrealized appreciation ............ 2,366,637
-------------
Net unrealized depreciation ............ $ (890,832)
=============
</TABLE>
(5) Shares of Beneficial Interest
The 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, Year Ended November 30,
1997 1996
------------------------- -------------------------
Shares Amount Shares Amount
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Treasury shares reacquired ...... 2,307,200 $15,523,255 6,154,700 $40,941,119
========= ============ ========= ============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 2,307,200 shares
of beneficial interest were purchased by the Trust during the period ended May
31, 1997, at an average price per share of $6.73 and a weighted average
discount of 9.1% per share. The Trust repurchased 6,154,700 shares of
beneficial interest during the year ended November 30, 1996, at an average
price per share of $6.65 and a weighted average discount of 9.7% per share.
Shares held in Treasury were repurchased in an attempt to return the market
value of the discount to shareholders in the form of higher monthly
distributions.
15
<PAGE>
Notes to Financial Statements -- continued
(6) Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Quarterly Period Ended Investment Income Net Investment Income
- ------------------------ --------------------- ---------------------
Per Per
Fiscal 1997 Amount Share Amount Share
- ----------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C>
February 28 ......... $ 9,993,101 $0.14 $ 8,686,382 $0.12
May 31 ............... 9,812,047 0.14 8,730,499 0.12
------------ ------ ------------ ------
$19,805,148 $0.28 $17,416,881 $0.24
============ ====== ============ ======
Fiscal 1996
- -----------
February 29 ......... $11,154,975 $0.13 $ 9,686,176 $0.12
May 31 ............... 11,060,989 0.15 9,595,620 0.12
August 31 ............ 11,084,186 0.14 9,659,873 0.13
November 30 ............ 10,550,068 0.14 9,191,327 0.12
------------ ------ ------------ ------
$43,850,218 $0.56 $38,132,996 $0.49
============ ====== ============ ======
Fiscal 1995
- -----------
February 28 ......... $12,162,338 $0.13 $10,700,322 $0.12
May 31 ............... 12,446,705 0.15 10,938,166 0.13
August 31 ............ 11,733,564 0.15 10,233,221 0.13
November 30 ............ 11,035,555 0.13 9,514,361 0.11
------------ ------ ------------ ------
$47,378,162 $0.56 $41,386,070 $0.49
============ ====== ============ ======
<CAPTION>
Net Realized and Net Increase (Decrease)
Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Ended on Investments from Operations
- ------------------------ ------------------------------- ------------------------------
Per Per
Fiscal 1997 Amount Share Amount Share
- ----------- ------------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
February 28 ......... $(11,695,351) $(0.16) $(3,008,969) $(0.04)
May 31 ............... (2,143,434) (0.03) 6,587,065 0.09
-------------- -------- ------------- --------
$(13,838,785) $(0.19) $ 3,578,096 $ 0.05
============== ======== ============= ========
Fiscal 1996
- ------------
February 29 ......... $(11,159,323) $(0.14) $(1,473,147) $(0.02)
May 31 ............... (15,304,186) (0.19) (5,708,566) (0.07)
August 31 ............ (1,079,673) (0.01) 8,580,200 0.11
November 30 ............ 20,647,430 0.27 29,838,757 0.40
-------------- -------- ------------- --------
$ (6,895,752) $(0.07) $31,237,244 $ 0.42
============== ======== ============= ========
Fiscal 1995
- -----------
February 28 ......... $ 13,491,579 $ 0.22 $24,191,901 $ 0.35
May 31 ............... 25,867,253 0.24 36,805,419 0.37
August 31 ............ (1,867,003) (0.02) 8,366,218 0.09
November 30 ............ 15,628,328 0.20 25,142,689 0.32
-------------- -------- ------------- --------
$ 53,120,157 $ 0.64 $94,506,227 $ 1.13
============== ======== ============= ========
</TABLE>
(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 $400 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 period ended May 31,
1997, was $2,341.
(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 swap agreements. The notional or contractual amounts of
these instruments represent the investment the Fund 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, 1997, is as follows:
16
<PAGE>
Written Option Transactions
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
--------------------------------------- -----------------------------------
Principal Amounts of Principal Amounts of
Contracts (000 Omitted) Premiums Contracts (000 Omitted) Premiums
- -------------------------------------------------------------------------- ------------- ------------------------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -- -- $ -- -- $ --
Options written --
Australian Dollars ........................... 2,765 $ 18,676 -- --
Swiss Francs/Deutsche Marks .................. 19,084 133,083 -- --
United States Dollars ........................ 28,000 188,281 -- --
Options terminated in closing transactions --
Australian Dollars ........................... (2,765) (18,676) -- --
Options expired --
United States Dollars ........................ (28,000) (188,281) -- --
-------- ---------- ------- --------
Outstanding, end of period .................. 19,084 $ 133,083 -- $ --
======== ========== ======= ========
Option outstanding at end of period consist of:
Swiss Francs/Deutsche Marks ............... 19,084 $ 133,083 -- $ --
-------- ---------- ------- --------
Outstanding, end of period .................. 19,084 $ 133,083 -- $ --
======== ========== ======= ========
</TABLE>
At May 31, 1997, the Trust had sufficient cash and/or securities at least equal
to the value of written options.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange For at Value Appreciation (Depreciation)
- ------------------------------------- ---------------------- ----------------- ------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales
6/30/97 ............... CAD 9,069,939 $ 6,755,000 $ 6,590,254 $ 164,746
6/30/97 - 9/30/97 ...... DEM 22,866,459 13,772,290 13,470,304 301,986
6/30/97 - 9/30/97 ...... ESP 2,114,069,924 14,783,598 14,650,870 132,728
6/30/97 - 9/30/97 ...... JPY 108,097,050 912,866 933,526 (20,660)
8/26/97 ............... NOK 8,814,568 1,308,032 1,244,872 63,160
6/30/97 - 9/30/97 ...... SEK 41,379,875 5,347,273 5,630,053 (282,780)
------------ ------------ ----------
$42,879,059 $42,519,879 $ 359,180
============ ============ ==========
Purchases
9/30/97 ............... CHF 3,339,188 $ 2,401,710 $ 2,400,302 $ (1,408)
9/30/97 ............... DEM 3,699,186 2,190,033 2,187,998 (2,035)
9/30/97 ............... DKK 34,489,696 5,392,385 5,344,489 (47,896)
8/26/97 ............... ECU 1,280,000 1,470,720 1,463,212 (7,508)
6/30/97 ............... ESP 991,555,978 6,958,776 6,866,525 (92,251)
6/30/97 ............... ITL 11,006,332,360 6,518,281 6,504,742 (13,539)
6/30/97 ............... SEK 3,806,483 542,219 491,889 (50,330)
------------ ------------ ----------
$25,474,124 $25,259,157 $(214,967)
============ ============ ==========
</TABLE>
17
<PAGE>
Notes to Financial Statements -- continued
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts, excluded from above,
amounted to a net receivable of $2,093,152 with Banker's Trust, $613,926 with
Swiss Bank Corp., $334,523 with Deutschebank, $203,862 with Merrill Lynch,
$161,755 with J.P. Morgan, and $2,512 with Chase Manhattan Bank and a net
payable of $826,260 with C.S. First Boston at May 31, 1997.
At May 31, 1997, the Trust had sufficient cash and/or securities to cover any
commitments under these
contracts.
Interest Rate Swaps
<TABLE>
<CAPTION>
Notional Principal Cash Flows Cash Flows Unrealized
Expiration Amount of Contract Paid by the Trust Received by the Trust Depreciation
- ------------- -------------------- ------------------- ----------------------- -------------
<S> <C> <C> <C> <C> <C>
5/22/04 ITL 9,150,000,000 ITL-Libor-BBA Fixed -- 7.09% $(80,509)
==========
</TABLE>
At May 31, 1997, the Trust has segregated sufficient cash and/or securities to
cover margin requirements on open interest rate swaps.
(9) Restricted Securities
The Trust may invest not more than 10% of its assets in securities which are
subject to legal or contractual restrictions on resale. At May 31, 1997, the
Trust owned the following restricted securities (constituting 1.76% of its net
assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). 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 or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Par
Date of Amount
Description Acquisition (000 omitted) Cost Value
- ---------------------------------------------------- ------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
FHA (Kimberly Woods Project Loan), 8.25s, 2027 3/29/93 $6,240 $6,470,984 $6,486,180
FHA (USGI 986 Spring Hill), 10.375s, 2030 8/16/93 2,457 2,651,855 2,725,146
-----------
$9,211,326
===========
</TABLE>
18
<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, 1997, the related statement of operations for the six months then ended,
the statement of changes in net assets for the six months ended May 31, 1997
and the year ended November 30, 1996, and the financial highlights for the six
months ended May 31, 1997 and for each of the years in the ten-year period
ended November 30, 1996. 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, 1997 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, 1997, 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
July 3, 1997
19
<PAGE>
MFS(R) Government Markets Income Trust
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey* (2)
Private Investor; Former Chairman and
Director (until 1991), Massachusetts
Financial Services Company;
Director, Cambridge Bancorp;
Director, Cambridge Trust 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);
President, Benchmark Consulting
Group, Inc. (office services);
Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott *
Senior Executive Vice President,
Director and Secretary,
Massachusetts Financial
Services Company
Jeffrey L. Shames*
President and Director,
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
[recycle logo] This report is printed on recycled paper.
MGFCE-3 7/97 62M
