MERRILL LYNCH
HIGH INCOME
MUNICIPAL BOND
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1999
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
ArthurZeikel, Director
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Theodore R. Jaeckel Jr., Vice President
John M. Loffredo, Vice President
Donald C. Burke, Vice President
and Treasurer
William E. Zitelli, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report, including the financial information herein, is
transmitted to the shareholders of Merrill Lynch High Income
Municipal Bond Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the
purchase of shares of the Fund or any securities mentioned in the
report. Past performance results shown in this report should not be
considered a representation of future performance. Statements and
other information herein are as dated and are subject to change.
Merrill Lynch High Income
Municipal Bond Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
Merrill Lynch High Income Municipal Bond Fund, Inc.
DEAR SHAREHOLDER
For the three-month period ended May 31, 1999, Merrill Lynch High
Income Municipal Bond Fund, Inc. earned $0.134 per share income
dividends. This represents a net annualized yield of 4.93%, based on
a month-end per share net asset value of $10.75. Over the same
period, the Fund's total investment return was +1.06%, based on a
change in per share net asset value from $10.77 to $10.75, and
assuming reinvestment of $0.132 per share income dividends.
The Municipal Market Environment
Long-term bond yields generally moved higher during the three months
ended May 31, 1999. As in prior months, increasingly strong domestic
economic growth was offset by increased productivity by US companies
and the near absence of any inflationary pressures. This ideal
environment allowed US Treasury bond yields to trade in a relatively
narrow range, with yields generally close to 5.60% throughout March
and April. However, in May the combination of an unexpectedly strong
consumer price report and a warning from the Federal Reserve Board
that it was considering an eventual increase in short-term interest
rates pushed long-term bond yields appreciably higher. By the end of
May, US Treasury bond yields stood at 5.83%, an increase of more
than 25 basis points (0.25%) during the May quarter. Long-term
municipal bond yields followed a similar although muted pattern, as
measured by the Bond Buyer Revenue Bond Index. In March and April,
tax-exempt bond yields traded in a relatively narrow range, at
approximately 5.30%. During May, long-term municipal bond yields
rose just over 10 basis points to end the month at 5.41%.
The tax-exempt bond market's strong technical position has prevented
municipal bond yields from increasing as much as their taxable
counterparts in recent months. The principal factor promoting this
technical support has been the decline of municipal bond issuance.
During the three months ended May 31, 1999, less then $120 billion
in new long-term tax-exempt securities was underwritten, a decline
of over 12% compared to the same period a year ago. During the three
months ended May 31, 1999, municipalities issued less than $60
billion in long-term tax-exempt securities, a decline of nearly 20%
compared to the May 31, 1998 quarter. During May 1999,
municipalities issued $15 billion in long-term securities, a decline
of nearly 40% compared to May 1998 levels. This represents the
lowest May issuance since 1995. Additionally, retail and
institutional demand remained positive, easily absorbing available
issuance. Investor demand is likely to remain positive going forward
since June and July usually are seasonally strong months.
Traditionally, investors receive significant cash inflows from bond
maturities and coupon payments during these months. Generally,
$15 billion--$20 billion becomes available for reinvestment each month.
Recent outperformance by the municipal bond market has come at the
expense of the very attractive yield ratios available in late 1998.
At year-end 1998, long-term municipal revenue bond yields were 102%
of comparable US Treasury bond yields. This ratio has declined as US
Treasury bond yields have risen faster than tax-exempt bond yields.
At the end of May, the yield ratio was approximately 92%, still well
above the historic average of 86%--88%. This yield ratio may rise
somewhat in the coming months if issue supply were to suddenly
increase. However, yield ratios in excess of 100% are unlikely in
the near future. We believe that municipal bond yield ratios
approaching 100% are rare and short-lived, and provide a good
investment opportunity.
Further increases in bond yields are likely to be dependent on an
acceleration in US economic growth. However, it is also likely that
the increases in interest rates seen over recent months have yet to
fully impact the US economy. For example, recent increases in
mortgage rates have yet to slow home purchases or construction.
Additionally, economic indicators of future price inflation, such as
the price of gold or world commodity prices, all remain well
contained. In such an environment, any moves by the Federal Reserve
Board to slow economic growth are likely to be gradual and limited.
Furthermore, any Federal Reserve Board action is also likely to keep
inflation low in the United States for the remainder of 1999 and
into 2000. This suggests that while interest rates may have further
to rise, any increases are not expected to be major but are likely
to be temporary should the US economy slow later this year.
Merrill Lynch High Income Municipal Bond Fund, Inc.
May 31, 1999
Portfolio Strategy
Portfolio activity during the quarter ended May 31, 1999 continued
to reflect our belief that credit spreads in the tax-exempt
marketplace remained unattractive. As a result, our investment
strategy placed greater emphasis on flexibility to seek to take
advantage of more short-term trading opportunities. This requires a
greater emphasis on liquidity, so our investments focused on larger
and more widely distributed issues. Smaller issues are typically
closely held by a handful of investors. They tend to trade
infrequently and are subject to higher transaction costs, making
them unsuitable for our current needs. We expect that this greater
willingness to capitalize on short-term inefficiencies within the
high-yield tax-exempt arena will generate more turnover than the
portfolio has experienced in the past. However, we believe this
enhanced degree of liquidity will prove beneficial both in terms of
reducing credit risk as well as enabling us to be more responsive to
changes in our investment outlook.
Despite our circumspect view of current spread relationships, we
remain poised to move on any opportunity that may arise. During the
May quarter, relatively few issues met our criteria, so we held
excess cash positions from selected sales. Given the generally
inhospitable climate for fixed-income markets, these additional cash
reserves were not unwelcome. We continue to be extremely cautious
regarding the healthcare sector and have further reduced the
portfolio's exposure to that area. Call protection remains a
strategic focus, particularly in the current market environment
where the opportunity exists to lock in long-term yields at
attractive levels coupled with favorable redemption features.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch High Income
Municipal Bond Fund, Inc., and we look forward to assisting you with
your financial needs in the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Theodore R. Jaeckel, Jr.)
Theodore R. Jaeckel, Jr.
Vice President and Portfolio Manager
(John M. Loffredo)
John M. Loffredo
Vice President and Portfolio Manager
June 26, 1999
Merrill Lynch High Income Municipal Bond Fund, Inc.
May 31, 1999
PORTFOLIO COMPOSITION
For the Quarter Ended May 31, 1999
Top Ten States*
New Jersey 14.41%
Pennsylvania 9.31
Massachusetts 8.70
Virginia 8.36
Arizona 6.24
Illinois 5.31
Ohio 5.21
Texas 4.77
Colorado 4.58
Connecticut 4.44
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Total Top Ten 71.33
Total Others 28.67
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Total Portfolio 100.00%
=======
Net assets as of May 31, 1999 were $218,593,850.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 7%
AA/Aa 2%
A/A 2%
BBB/Baa 10%
BB/Ba 19%
B/B 16%
CCC/Caa 1%
NR+ 42%
Other++++ 1%
<<FN>
*Based on total market value of the portfolio as of May 31, 1999.
++Not Rated.
++++Temporary investments in short-term municipal securities.
ABOUT INVERSE FLOATERS
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest rates
decrease. Investment in inverse floaters may be characterized as
derivative securities and may subject the Fund to risks of reduced
or eliminated interest payments and losses of invested principal. In
addition, inverse floaters have the effect of providing investment
leverage and, as a result, the market value of such securities will
generally be more volatile than that of fixed rate, tax-exempt
securities. To the extent the Fund invests in inverse securities,
the market value of the Fund's portfolio and the net asset value of
the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
