MERRILL LYNCH
SHORT-TERM
GLOBAL INCOME
FUND, INC.
FUND LOGO
Quarterly Report
September 30, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Short-Term Global
Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Edward F. Gobora, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Chase Manhattan Bank N.A.
Global Securities Services
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Short-Term Global Income Fund, Inc., September 30, 1998
DEAR SHAREHOLDER
Throughout the quarter ended September 30, 1998, as emerging bond
markets and global equity markets deteriorated, bond markets in the
Group of Seven Industrialized Nations (G-7) rallied as yields in
most markets fell to new lows. Although economic fundamentals
remained supportive, with strong economic growth and benign
inflation in the United States and core Europe, investors' "flight
to quality" was the driving force influencing market conditions.
With the turmoil in Russia escalating and a continued lack of growth
in Japan and the rest of Asia, credit and swap spreads widened
dramatically during the September quarter. Risk premiums were on the
increase and corporate spreads in ten-year, A-rated securities
widened 35 basis points (0.35%). In addition, currency markets were
volatile during the quarter, and safe haven currencies remained well
bid, while commodity-based currencies were under extreme pressure.
The well-documented difficulties of large hedge funds added
uncertainty to the already fragile markets.
Central banks have been ready to add liquidity during the market
turmoil. At its Federal Open Market Committee meeting on September
29, 1998, the US Federal Reserve Board cut the discount rate by 25
basis points to 5.25%. This forced short-term interest rates in most
markets to move lower during the September quarter. The US central
bank cut the discount rate another 25 basis points after the
September quarter's close.
In this turbulent environment, we maintained our overweighted
position in high-quality, US dollar-denominated short-term
securities. Inflation fundamentals remained positive as commodity
prices continued to decline, with the CRB Commodity Index falling
below 200 for the first time in 12 years. We continue to believe the
turmoil in Asia and Russia will slow G-7 growth dramatically,
further containing inflationary pressures and possibly even leading
to a deflationary environment. As of September 30, 1998, we were
overweighted in US positions compared to those in Europe and Asia
because we expect continued turmoil in these markets. At September
30, 1998, the average credit quality of the portfolio was AAA rated,
primarily in high-quality US commercial, Government and agency
paper.
Market Review
North America
US Treasury bonds rallied over the six months ended September 30,
1998 with the yield on the 30-year bond declining 95 basis points to
4.98%, as turbulence in Asia and Russia drove investors to the
relative safety of US Treasury securities. Domestic economic data
continued to be supportive of second-quarter gross domestic product
(GDP), which fell to an annualized rate of 1.6% from last quarter's
torrid 5.5% pace. However, the effects of inventory buildup and the
General Motors strike have abated, and economic activity appears to
be slightly stronger in the third quarter of 1998. In addition, labor
markets remained tight with the unemployment rate stabilizing at 4.5%,
while the employment cost index rose 0.9% during the second quarter
compared to 0.7% in the previous quarter. However, we believe these
issues will be overshadowed by the lack of inflation and global
market uncertainty. alling commodity and oil prices remained very
supportive to inflation data, and there is little or no inflation
pressure. Therefore, we expect to remain overweighted in our US
issues because we expect the flight to quality to continue during
this period of supportive inflation fundamentals.
In Canada, continued weakness in commodity prices kept the Canadian
dollar under extreme pressure during the quarter ended September 30,
1998. The Bank of Canada was forced to raise short-term interest
rates by 100 basis points despite weak domestic economic data in
order to support the currency. However, the interest rate hike had
little impact as the Canadian dollar ended the period near C$1.53
relative to the US dollar. Second-quarter GDP recorded an annualized
rate of 3.1%, down from the first quarter's 3.7% rate, largely
because of a decline in retail sales in June. With inflation running
at the bottom of the 1%--3% target band, and the Canadian dollar at
such depressed levels, we expect to add to our Canadian exposure at
very attractive levels.
Europe
As 1998 progresses, the European Monetary Union (EMU) continues to
move ahead as scheduled. During the September quarter, yields in EMU
countries fell to new lows as capital flows into the region
accelerated because of emerging and equity market turmoil, while
expectations of higher short-term interest rates in Germany
dissipated. Since global growth is expected to slow, coupled with an
already high level of unemployment in the region, it seems likely
that interest rates will converge near the current German repurchase
rate of 3.30%. In our view, this will force interest rates in the
peripheral European countries to move lower and should ensure that
growth in the region does not slow too dramatically.
Looking ahead, we expect fundamentals in the region to remain
extremely supportive as growth in the European region seems to be
leveling off near 3% with net exports slowing slightly, while the
service sector accelerates at a moderate pace. In addition, we
believe gradually falling fiscal deficits could also add support to
the area. Helped by the backdrop of generally weak commodity prices,
Europe should be able to keep inflation low for an extended period.
However, fallout from the Russian economic crisis is one area of
concern in the region, since Europe has a much higher degree of
exposure to Russia than does the United States. In the coming
months, we will monitor the situation closely as we look for
European currencies to weaken relative to the US dollar.
Pacific Basin
During the quarter ended September 30, 1998, weakness in the region
continued to persist, despite the fact that the Russian economic
crisis has taken the spotlight away from Asia for now. Both the
Australian and New Zealand currencies were under extreme pressure
during the quarter as weakness in commodity prices and overall
weakness in the region have hit the currencies hard. Consumer
confidence remained very poor as unemployment continued to rise.
Throughout the September quarter, we kept our New Zealand government
bond position fully hedged in order to take advantage of interest
rate differentials without taking on currency exposure. However, we
will look to actively manage our currency hedges when opportunities
arise.
In Japan, the yen's decline slowed during the September quarter on
hopes that the new government will take the appropriate steps to
stabilize the banking system and stimulate the economy. After the
September quarter's close, the yen strengthened sharply relative to
the US dollar. Prime Minister Hashimoto was forced to resign as the
economic situation deteriorated, and former Foreign Minister Obuchi
was elected to the Prime Minister position. In September, the Bank
of Japan cut its overnight call to 0.25% from 0.45%, adding
liquidity and attempting to boost consumer confidence. It appears
that Japan's economy will suffer its largest post-war decline ever
this year as unemployment remains at a record high 4.3%. In
addition, enormous amounts of wealth disappeared and balance sheets
weakened during the quarter as the Nikkei Index traded to new lows,
while disposable income will probably fall outright for the first
time, even if permanent tax cuts are implemented. Consequently, we
will have no exposure to Japan as we expect the yen to resume its
decline relative to the US dollar.
In Conclusion
We thank you for your continued investment in Merrill Lynch Short-
Term Global Income Fund, Inc., and we look forward to reviewing our
outlook with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Edward F. Gobora)
Edward F. Gobora
Vice President and Senior
Portfolio Manager
October 30, 1998
Merrill Lynch Short-Term Global Income Fund, Inc., September 30, 1998
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors, as
detailed in the Fund's prospectus. If you were a Class A shareholder
prior to October 21, 1994, your Class A Shares were redesignated to
Class D Shares on October 21, 1994. However, in the case of certain
eligible investors, the shares were simultaneously exchanged for
Class A Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net
asset value on the payable date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent
Performance
Results*
<CAPTION>
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 9/30/98
<S> <C> <C> <C> <C>
ML Short-Term Global Income Fund, Inc. Class A Shares +4.98% +1.47% +20.98% 4.93%
ML Short-Term Global Income Fund, Inc. Class B Shares +4.02 +1.27 +29.02 4.32
ML Short-Term Global Income Fund, Inc. Class C Shares +3.78 +1.11 +13.41 4.19
ML Short-Term Global Income Fund, Inc. Class D Shares +4.58 +1.40 +34.83 4.67
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. The
Fund's inception periods are Class A & Class C Shares, from 10/21/94
to 9/30/98 and Class B & Class D Shares, from 8/03/90 to 9/30/98.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 +4.98% +0.78%
Inception (10/21/94) through 9/30/98 +4.95 +3.87
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 +4.02% +0.03%
Five Years Ended 9/30/98 +3.06 +3.06
Inception (8/03/90) through 9/30/98 +3.17 +3.17
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/98 +3.78% +2.78%
Inception (10/21/94) through 9/30/98 +3.24 +3.24
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/98 +4.58% +0.40%
Five Years Ended 9/30/98 +3.61 +2.77
Inception (8/03/90) through 9/30/98 +3.73 +3.21
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Short-Term Global Income Fund, Inc., September 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Face Maturity Interest Percent of
COUNTRIES Amount Date Issue Rate++ Value Net Assets
<S> <S> <C> <C> <S> <C> <C> <C>
Canada C$ 2,888,000 8/01/99 Government of Canada (1) 6.50 % $ 1,914,355 1.43%
5,400,000 12/29/99 Kingdom of Sweden (1) 8.25 3,664,766 2.73
2,350,000 12/29/99 Rabobank Nederland N.V. (2) 7.125 1,570,517 1.17
2,065,000 12/29/99 Toronto Dominion Australia (1) 6.25 1,365,704 1.02
Total Investments in Canada
(Cost--$9,238,493) 8,515,342 6.35
Germany DM 4,500,000 5/15/00 Bundes Obligations (1) 5.875 2,794,581 2.08
8,505,102 10/02/98 Grand Cayman, Time Deposit (2) 3.25 5,092,875 3.80
4,774,701 10/13/98 Grand Cayman, Time Deposit (2) 3.30 2,859,102 2.13
8,515,852 10/23/98 Grand Cayman, Time Deposit (2) 3.125 5,099,312 3.80
Total Investments in Germany
(Cost--$15,486,730) 15,845,870 11.81
Italy Lit 4,835,000,000 10/01/98 Buoni Poliennali del Tesoro
(Italian Government Bonds)(1) 9.00 2,925,870 2.18
5,000,000,000 4/01/99 Buoni Poliennali del Tesoro
(Italian Government Bonds)(1) 8.50 3,084,115 2.30
Total Investments in Italy
(Cost--$5,971,148) 6,009,985 4.48
New NZ$ 16,200,000 11/25/98 New Zealand Treasury Bill (1) 6.00 8,036,901 5.99
Zealand
Total Investments in New Zealand
(Cost--$8,038,404) 8,036,901 5.99
United Pound 2,135,000 8/10/99 Abbey National PLC (2) 6.00 3,592,905 2.68
Kingdom Sterling 1,300,000 2/25/00 Daimler Benz UK (2) 7.00 2,206,699 1.64
Total Investments in the United
Kingdom (Cost--$5,549,954) 5,799,604 4.32
United US$ 6,000,000 10/15/98 Amsterdam Funding Corp. (2) 5.53 5,987,097 4.46
States 18,000,000 10/09/98 Federal Home Loan Bank (3) 5.42 17,978,320 13.40
10,000,000 10/26/98 Federal Home Loan Mortgage
Corp. (3) 5.39 9,962,569 7.43
10,000,000 11/25/98 Federal Home Loan Mortgage
Corp. (3) 5.12 9,921,778 7.40
8,000,000 12/18/98 Federal Home Loan Mortgage
Corp. (3) 5.28 7,908,480 5.89
5,000,000 10/01/98 Federal National Mortgage
Association (3) 5.00 5,000,000 3.73
15,000,000 12/22/98 Federal National Mortgage
Association (3) 5.27 14,819,942 11.05
7,000,000 1/25/99 Federal National Mortgage
Association (3) 5.02 6,886,771 5.13
7,119,000 12/11/98 General Electric Capital Corp. (2) 5.50 7,130,967 5.32
6,092,000 10/01/98 General Motors Acceptance
Corp. (2) 5.88 6,092,000 4.54
5,126,000 12/03/98 Landesbank Rhein (2) 5.25 5,130,419 3.82
Total Investments in the
United States (Cost--$96,756,934) 96,818,343 72.17
Total Investments (Cost--$141,041,663) 141,026,045 105.12
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (163,109) (.12)
Liabilities in Excess of Other Assets (6,711,261) (5.00)
------------ -------
Net Assets $134,151,675 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $21,318 and
2,745 shares outstanding $ 7.77
============
Class B--Based on net assets of $123,397,072 and
16,049,638 shares outstanding $ 7.69
============
Class C--Based on net assets of $9,236 and 1,220
shares outstanding $ 7.57
============
Class D--Based on net assets of $10,724,049 and
1,394,372 shares outstanding $ 7.69
============
<FN>
Corresponding industry groups for securities (percent of net assets):
(1)Sovereign Government Obligations--17.73%
(2)Financial Services--33.36%
(3)Sovereign/Regional Government Obligations--Agency--54.03%
++Commercial Paper and certain US Treasury and Foreign Treasury
Obligations are traded on a discount basis; the interest rates shown
represent the yield-to-maturity at the time of purchase by the Fund.
Other securities bear interest at the rates shown, payable at fixed
dates or upon maturity. Interest rates on floating rate securities
are adjusted periodically based on appropriate indexes; the interest
rates shown are those in effect at September 30, 1998.
++++Forward foreign exchange contracts as of September 30, 1998
were as follows:
Expiration Unrealized
Foreign Currency Sold Date Depreciation
C$ 13,923,574 October 1998 $ (7,021)
DM 17,573,644 October 1998 (92,125)
Pound 3,442,791 October 1998 (35,495)
Sterling
Lit 5,531,001,399 October 1998 (28,468)
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts--Net
(US$ Commitment--$28,683,647) $ (163,109)
===========
</TABLE>
