MERRILL
LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report August 31, 1994
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.
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
DEAR SHAREHOLDER
Economic Environment
During the second quarter of 1994, gross domestic product (GDP) was
reported at 3.8%, up from the 3.4% pace reported in the first
quarter. In citing "evidence of continuing strength in the economic
expansion and high levels of resource utilization," the Federal
Reserve Board tightened monetary policy once again on August 16,
1994. In raising interest rates for the fifth time this year, the
Federal Reserve Board pushed both the Federal Funds and discount
rates up 50 basis points (0.50%) to 4.75% and 4.00%, respectively,
and reinforced to the financial markets its commitment to limiting
potential inflationary pressures on the US economy.
Although GDP was reported higher in the second quarter, a closer
look at the data reveals the US economy is continuing on a course of
moderate growth with no apparent signs of accelerating inflation.
Much of the rise in second quarter GDP was attributable to a buildup
in business inventory. This buildup was the result of a depletion of
inventory in the latter half of 1993 and the first part of 1994
resulting from strong domestic demand from the consumer and housing
sectors. Since then, both the consumer and housing sectors have
slowed considerably. Housing starts fell 9.4% in June and rose 4.7%
in July. Although increasing in July, new residential construction
remains below the second quarter average and well below the peak of
late 1993. Real consumer spending is also declining. After rising a
sharp 4.7% in the first quarter, consumer spending slumped to just
1.4% in the second quarter. As further evidence of slowing demand
growth, retail sales declined 0.1% in July and have either been flat
or down in three of the four previous months.
On the employment front, job growth has fallen notably. After
peaking at 379,000 new jobs in March, non-farm payrolls increased by
only 179,000 in August, the smallest such increase since January. In
addition, the unemployment rate remains steady at 6.1%. Wages, an
indicator of inflationary pressures and discretionary consumer
purchasing power, remain under control. Hourly wages edged up 2.0%
in August and are up just 2.5% from one year ago. The latest
inflation data also shows no sign of escalating pressures on both
the wholesale and retail fronts. The core Producer Price Index (PPI)
and Consumer Price Index (CPI) were up just 0.1% and 0.2%,
respectively, in July. So far this year the core CPI has risen at a
2.9% annual rate, compared with 3.1% in 1993. Inflation fundamentals
also remain under control. Unit labor costs for non-financial US
corporations are down 1.6% for the past year, the best performance
since 1959. In the industrial sector, unit labor costs have declined
for three consecutive years and are down 2.5% from a year ago.
<PAGE>
The remainder of 1994 should bode well for fixed-income securities
as economic growth and inflation remain temperate and interest rate
volatility subsides. GDP, in our opinion, will be lower in the third
quarter as reduced domestic demand and a sharp reduction in
inventory building hold back GDP growth.
Portfolio Matters
The period ahead looks bright for the adjustable rate mortgage (ARM)
market as interest rate volatility subsides and ARM coupons begin to
fully reset off higher indexed values. After tightening monetary
policy in August, Federal Reserve Board Chairman Alan Greenspan
stated the latest rate hike "should be sufficient, at least for a
time, to meet the objective of sustained non-inflationary growth.
With the Federal Reserve Board likely to refrain from further action
until the latter half of the fourth quarter, we expect volatility in
the financial markets to decline, allowing the ARM market to
recapture some of its setback from rising interest rates earlier in
the year.
During the three-month period ended August 31, 1994, the US Treasury
yield curve continued to flatten. The two-year Treasury note rose 16
basis points to 6.14% while the 30-year Treasury bond increased just
two basis points to 7.45%. A flatter curve benefits the ARM market
in two ways. First, as the yield curve flattens, ARM origination
declines as the spread between fixed-rate mortgages and ARMs
narrows, giving homeowners less of an incentive to opt for an ARM.
This leads to a reduction in available supply in the market, causing
ARM spreads to tighten and prices to increase. Second, a flattening
yield curve causes the forward curve to decrease in value, thereby
reducing the cost of interest rate caps. As the forward curve (a
forecaster of future interest rates based on the shape of the yield
curve and an evaluator of interest rate caps) decreases in value,
interest rate caps become less costly and ARM securities gain in
value.
With a vigilant Federal Reserve Board monetary policy causing short-
term interest rates to remain under pressure, we have reduced the
portfolio's overall duration from 2.0 years to 1.3 years or just
slightly longer than the one-year Treasury bill. In addition, we
continue to improve the quality and liquidity value of the
portfolio. Since our most recent report to shareholders, we have
reduced our holdings of AAA-rated and AA-rated securities by over
20% and expect to further reduce our holdings of non-agency
securities as the year progresses. Our fundamental investment
strategy remains unchanged. We continue to emphasize interest rate
sensitive London Interbank Offered Rate and Constant Maturity
Treasury Indexed ARMs with attractive yield and net asset value
enhancing characteristics. Despite the sizable rise in interest
rates and the lagging reset nature of ARMs, at August 31, 1994 the
Fund's Class A and Class B Shares yielded 4.75% and 4.25%,
respectively. When we reach the reset dates for the Fund's ARMs
investments, their coupons will adjust upward to reflect current
yields.
<PAGE>
In Conclusion
We thank you for your continued investment in Merrill Lynch
Adjustable Rate Securities Fund, Inc., and we look forward to
reviewing our outlook and strategy again with you in our upcoming
semi-annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
September 19, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
Class A and Class B Shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
<TABLE>
Performance
Summary--
Class A Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91-12/31/91 $10.00 $ 9.99 -- $0.289 +2.82%
1992 9.99 9.77 -- 0.547 +3.36
1993 9.77 9.73 -- 0.362 +3.35
1/1/94-8/31/94 9.73 9.50 -- 0.247 +0.39
------
Total $1.445
Cumulative total return as of 8/31/94: +10.26%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
include sales charge; results would be lower if sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91-12/31/91 $10.00 $ 9.99 -- $0.268 +2.60%
1992 9.99 9.77 -- 0.497 +2.84
1993 9.77 9.73 -- 0.313 +2.83
1/1/94-8/31/94 9.73 9.51 -- 0.217 +0.07
------
Total $1.295
Cumulative total return as of 8/31/94: +8.58%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions
at net asset value on the payable date, and do not reflect deduction of any sales
charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
8/31/94 5/31/94 8/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.50 $9.53 $9.76 -2.66% -0.31%
Class B Shares* 9.51 9.53 9.77 -2.66 -0.21
Class A Shares--Total Return* +1.29(1) +0.91(2)
Class B Shares--Total Return* +0.68(3) +0.78(4)
Class A Shares--Standardized 30-day Yield 4.98%
Class B Shares--Standardized 30-day Yield 4.62%
<FN>
*Investment results shown do not reflect any sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.106 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.375 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.094 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.326 per share ordinary income dividends.
</TABLE>
<PAGE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/94 +1.01% -2.02%
Inception (8/2/91) through 6/30/94 +3.13 +2.06
[FN]
*Maximum sales charge is 3%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/94 +0.40% -2.51%
Inception (8/2/91) through 6/30/94 +2.62 +2.31
[FN]
*Maximum contingent deferred sales charge is 3% and is reduced to
0% after 3 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <C> <C> <C>
Adjustable Rate* Constant Maturity $ 4,860,690 Bear Stearns Secured Investors,
Mortgage-Backed Treasury Indexed Inc. II, Pass-Through 91-1-A,
Obligations** Obligations 7.90% due 11/25/2021 $ 4,952,222 $ 4,808,831 1.45%
Federal Home Loan Mortgage
Corporation:
3,114,024 7.739% due 5/01/2015 3,166,573 3,201,606 0.96
15,296,086 5.462% due l/01/2020 15,434,278 15,391,687 4.63
100,961 7.265% due 8/01/2020 103,296 99,426 0.03
11,705,207 5.903% due 8/01/2031 12,100,258 11,983,206 3.60
Federal National Mortgage
Association:
699,512 6.65% due 10/01/2013 719,623 706,945 0.21
2,484,438 7.25% due 11/01/2013 2,555,866 2,532,574 0.76
1,775,269 6.25% due 9/01/2015 1,826,308 1,799,679 0.54
15,059,094 5.75% due 1/01/2020 15,256,425 15,294,392 4.60
6,911,306 6.815% due 12/01/2021 7,053,852 7,023,615 2.11
23,989,944 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
5.993% due 10/01/2022 24,589,693 24,409,769 7.34
Resolution Trust Corporation,
REMIC (a):
2,808,729 91-M7-A3, 6.465% due l/25/2021 2,817,506 2,805,218 0.84
5,579,269 92-6-B4, 7.333% due 11/25/2025 5,716,745 5,523,421 1.66
10,000,286 92-4-B2, 5.861% due 7/25/2028 10,102,533 9,872,157 2.97
13,615,138 Sears Mortgage Securities
Corporation, REMIC (a) 92-11-A1,
5.357% due 4/25/2022 13,752,290 13,498,133 4.06
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <C> <C> <C>
Adjustable Rate* Cost of Funds $ 9,279,512 DLJ Mortgage Acceptance
Mortgage-Backed Indexed Corp., REMIC (a) 91-6-A1,
Obligations** Obligations 91-6-A1, 7.827% due 9/01/2021 $ 9,494,100 $ 9,296,957 2.80%
(concluded) Federal National Mortgage
Association:
1,203,475 5.50% due 7/01/2017 1,250,768 1,214,569 0.37
11,248,843 5.50% due 10/01/2028 11,690,888 11,349,028 3.41
10,619,145 5.501% due 2/01/2029 11,036,444 10,574,346 3.18
1,841,003 Kidder Peabody Acceptance
Corporation I, REMIC (a)
88-04-A, 6.601% due 1/01/2019 1,907,739 1,809,360 0.54
8,705,270 Resolution Trust Corporation,
REMIC (a) 91-M6-A2, 5.472%
due 6/25/2021 8,864,117 8,389,704 2.52
2,383,161 Ryland--First Nationwide Trust,
REMIC (a) 88-l-A, 5.608%
due 10/15/2018 2,460,614 2,362,308 0.71
London Interbank 5,688,257 Federal Home Loan Mortgage
Offered Rate Corporation, 3.920% due
Indexed 2/01/2024 5,835,303 5,633,152 1.70
Obligations 123,421 Federal Home Loan Mortgage
Corporation, REMIC (a) 92-1363-C,
4.945% (c) due 2/25/2022 1,470,602 740,529 0.22
5,004,001 Federal National Mortgage
Association, 5.75% due 8/01/2024 5,102,473 5,102,517 1.54
3,631,425 Fund America Investors Corporation
II, Pass-Through 93-K-F,
6.75% due 1/25/2023 3,631,425 3,631,425 1.09
Resolution Trust Corporation,
REMIC (a):
6,510,700 91-M7-B, 6.50% due 1/25/2021 6,510,700 6,518,838 1.96
15,000,000 92-C1-B, 6.50% due 8/25/2023 14,446,922 15,227,344 4.58
27,000,000 Saxon Mortgage Securities
Corporation, REMIC (a)
92-3-B, 5.488% due 10/01/2021 27,620,000 27,210,938 8.18
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 231,469,563 228,011,674 68.56
<PAGE>
Fixed Rate 32,904,487 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a)
Obligations** 93-I-A3, 0.50% (c) due 9/25/2023 (d) 465,904 329,045 0.10
364,718 Citicorp Mortgage Securities Inc.,
REMIC (a) 92-12-A3, 8.00% due
3/25/2021 371,106 362,154 0.11
30,505 Collateralized Mortgage Securities
Corp., REMIC (a) 90-5-L, 7.592%
(b) due 9/20/2020 710,802 500,747 0.15
99,291,957 DLJ Mortgage Acceptance Corp., REMIC
(a) 92-6-A1, 0.644% (c)
due 7/25/2022 (d) 1,601,423 1,211,362 0.37
Federal National Mortgage Association,
REMIC (a):
42,354 91-G-46-K, 10.085% (b) due
12/25/2009 1,563,204 1,105,535 0.33
3,266 90-142-K, 11.632% (b) due
7/25/2014 101,505 24,330 0.01
3,847,521 Federal National Mortgage Association
Trust 32-2, 8.50% (c) due
4/01/2018 (d) 3,372,546 1,260,063 0.38
8,491,713 Kidder Peabody Acceptance Corporation,
REMIC (a) 93-Ml-A2, 7.15% due
4/25/2025 8,454,978 8,098,972 2.44
Prudential Home Mortgage Securities
Company, Inc., REMIC (a):
369 92-1-A9, 13.50% (b) due 2/25/2022 69,916 17,504 0.01
22,524,185 93-44-A2, 6.75% due 8/25/2023 22,942,264 22,017,391 6.62
29,207,405 Residential Funding Mortgage
Securities I, Inc., REMIC (a)
92-S3-A9, 0.50% (c) due
1/01/2007 (d) 2,162,427 81,781 0.03
8,384,785 Resolution Trust Corporation,
REMIC (a) 92-CHF-B, 7.15% due
12/25/2020 8,487,998 8,412,297 2.53
Sears Mortgage Securities Corp.,
REMIC (a):
4,929 91-K-A4, 18.00% (b) due 9/25/2021 723,101 749,244 0.23
63,411,128 92-12-A3, 0.52% (c) due
7/25/2023 (d) 802,142 832,271 0.25
Total Investments in Fixed Rate
Mortgage-Backed Obligations 51,829,316 45,002,696 13.56
Total Investments in Mortgage-Backed
Obligations 283,298,879 273,014,370 82.12
<PAGE>
US Government & 10,000,000 US Treasury Notes, 6.00% due
Agency Obligations 6/30/1996 9,987,500 9,984,375 3.00
Total Investments in US Government
& Agency Obligations 9,987,500 9,984,375 3.00
Short-Term Repurchase 15,000,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 8/31/1994 to
yield 4.85% to 9/01/1994 15,000,000 15,000,000 4.51
Total Short-Term Securities 15,000,000 15,000,000 4.51
Total Investments $308,286,379 297,998,745 89.63
============
Other Assets Less Liabilities 34,480,721 10.37
------------ -------
Net Assets $332,479,466 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $20,375,598 and 2,144,077
shares outstanding $ 9.50
============
Class B--Based on net assets of $312,103,868 and 32,826,862
shares outstanding $ 9.51
============
<FN>
*Adjustable Rate Obligations have coupon rates which reset periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a result of
prepayments or refinancings of the underlying mortgage instruments. As a result,
the average life may be substantially less than the orginal maturity.
***Repurchase Agreements are fully collateralized by US Government & Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Represents the approximate yield to maturity. These securities have a high coupon
interest rate and were purchased at a substantial premium to their original face amounts.
Monthly premium amortization, due to prepayments, reduces considerably the net interest
income earned on these securities.
(c)Represents the approximate yield to maturity.
(d)Represents the interest only portion of a mortgage-backed obligation.
</TABLE>
