MERRILL
LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report February 28, 1994
This report is not authorized for use as an offer of sale or
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
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
Officers and
Directors
Arthur Zeikel, President and 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
<PAGE>
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
The US economy grew at an extremely rapid pace in the final quarter of
1993. Gross domestic product (GDP) was revised upward at a 7.5% annual
rate from a previously reported 5.9% rate, the strongest rate of growth
since the first quarter of 1984. In a preemptive strike against a potential
escalation of inflationary forces as a result of stronger-than-expected
economic growth, Federal Reserve Board Chairman Alan Greenspan
tightened monetary policy by pushing the Federal Funds rate up by 25
basis points (0.25%) on February 4, 1994. The tightening was the first
such move by the Federal Reserve Board in five years and created
negative ramifications in the US fixed-income markets as interest
rates of US Treasury securities rose 35 basis points--50 basis points as
investors focused on future inflationary implications.
In breaking down the components of the GDP report, the interest-rate
sensitive sectors of the economy (capital goods, residential construc-
tion and consumer cyclicals) all posted sharp gains as a result of the
overall low interest rate environment. During the February quarter,
new home sales reached a 14-year high, and consumer spending rose
sharply as automobile and home furnishing sales posted dramatic
increases. While economic activity has been robust, inflationary
pressures remain subdued. The Consumer Price Index rose 2.7% in
1993 after rising 2.9% in 1992, the best back-to-back performance
since the mid-1960s. On the wholesale front, there was almost no
inflation as the Producer Price Index rose a mere 0.2% in 1993. We expect
this scenario to continue in 1994 since the level of US productivity has
increased, raising the overall non-inflationary growth potential of
the economy.
Intensified global competition has forced US companies to heavily
invest in productivity-enhancing technology, which has ultimately
led to significant corporate downsizing. Manufacturing productivity
rose at an annual rate of 12.3% in the fourth quarter and 5.1% for all
of 1993 despite the loss of nearly 176,000 jobs and with payrolls at
their lowest levels in nearly 28 years. More importantly, hourly wage costs
remain under control, rising only 2.5% in 1993. As a result, unit labor
costs, an indicator of underlying inflationary forces, declined for the
second straight quarter, the first such consecutive decline in 31 years.
While commodity prices, a financial market indicator of inflation, have
risen and may rise further, they are rising from depressed levels and
would need to increase much further before signaling a pickup in broader
measures of inflation.
<PAGE>
Unlike last year when first quarter growth collapsed, fourth quarter
momentum should carry over into 1994, although at a more subdued
pace. Consumer spending will likely fall more in line with wage growth
since the surge in spending during the latter half of 1993 has put the
consumer debt/household income ratio near an all-time high. Job
growth should continue to remain sluggish in response to continued
increases in productivity, limiting overall income growth. A contrac-
tionary fiscal policy will dampen GDP, as higher taxes and reduced
government spending should hold back economic growth. In addition,
we expect the effects of the winter weather and the recent earthquake
in California to marginally restrain first quarter economic activity.
Looking ahead, inflation is the key determinant of interest rates, and
wage and productivity developments ultimately are the critical determi-
nants of inflation. If wage pressures continue to be offset by productivity
gains, inflation will be stable at around current levels. In this scena-
rio, interest rates are not likely to rise appreciably in 1994.
Investment Strategy
The US financial markets exhibited extreme volatility during the
February quarter, rallying on weak economic reports while declining
on strong economic data, before ultimately rising on the Federal
Reserve Board's tightening of monetary policy. Since this tightening, the
yield on the one-year US Treasury bill rose 33 basis points while rang-
ing from 3.47% to 4.03% during the period. The 30-year US Treasury bond
exhibited even greater volatility with its yield fluctuating from 5.79%
to 6.87%. Nevertheless, the Fund's large holdings of fully indexed and
frequently adjusting adjustable rate mortgages (ARMs) helped it avoid
much of the market's volatility.
Fully indexed ARMs, which have current market coupons fully adjusted
off their benchmark indexes, offer tremendous value in a rising interest
rate environment. Not only do they typically offer higher lifetime inter-
est rate caps, but their interim caps are less likely to restrict their
next coupon adjustment based off higher market rates, which in
turn limits their price decline. Frequently adjusting ARMs offer the
greater value in a rising interest rate environment. These ARMs, which
typically have their coupons reset monthly or semi-annually based off
market interest rates, provide great price stability with current market
yields as a result of their high degree of sensitivity to interest
rate movements.
During the period under review, the Fund nearly doubled its holdings of
frequently adjusting London Interbank Offered Rate indexed ARMs
from 10.69% to 20.31% of net assets. In addition, the Fund reduced its
holdings of fixed-rate obligations from 16.06% to 13.43%. This strategy
will enable the Fund to provide greater yield sensitivity to changes
in interest rates as market uncertainties continue and fears of further
monetary tightening abound.
<PAGE>
We thank you for your continued investment in Merrill Lynch Adjust-
able Rate Securities Fund, Inc., and we look forward to reviewing our
outlook and strategy with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
March 24, 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
Period Covered Beginning Ending Distributed Dividends 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--2/28/94 9.73 9.72 -- 0.047 +0.48
------
Total $1.245
Cumulative total return as of 2/28/94: +10.36%**
<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
Period Covered Beginning Ending Distributed Dividends 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--2/28/94 9.73 9.72 -- 0.041 +0.42
------
Total $1.119
Cumulative total return as of 2/28/94: +8.96%**
<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
2/28/94 11/30/93 2/28/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.72 $9.71 $9.76 -0.41% +0.10%
Class B Shares 9.72 9.71 9.76 -0.41 +0.10
Class A Shares--Total Return +3.34(1) +1.03(2)
Class B Shares--Total Return +2.83(3) +0.90(4)
Class A Shares--Standardized 30-day Yield 4.29%
Class B Shares--Standardized 30-day Yield 3.92%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1) Percent change includes reinvestment of $0.361 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.089 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.312 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.077 per share ordinary income dividends.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 +3.35% +0.25%
Inception (8/2/91) through 12/31/93 +3.96 +2.66
[FN]
*Maximum sales charge is 3%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +2.83% -0.16%
Inception (8/2/91) through 12/31/93 +3.43 +3.05
[FN]
*Maximum contingent deferred sales charge is 3% and is reduced to 0%
after 3 years.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Constant Maturity $ 6,827,712 Bear Stearns Secured Investors, Inc. II,
Mortgage-Backed Treasury Indexed Pass-Through 91-1-A, 7.90% due 11/25/2021 $ 6,956,502 $ 6,994,138 1.57%
Obligations** Obligations Federal Home Loan Mortgage Corporation:
12,833,942 5.396% due 8/01/2031 13,267,088 13,275,109 2.98
3,380,304 7.746% due 5/01/2015 3,437,347 3,521,854 0.79
148,665 8.105% due 8/01/2020 152,103 151,638 0.03
Federal National Mortgage Association:
2,614,505 5.31% due 11/01/2013 2,689,672 2,727,255 0.61
2,066,314 5.68% due 9/01/2015 2,125,720 2,155,424 0.48
770,125 5.85% due 10/01/2013 792,266 803,337 0.18
7,979,200 6.801% due 12/01/2021 8,143,771 8,318,316 1.86
12,000,000 Government National Mortgage Association,
4.50% due 1/20/2024 12,014,974 11,842,500 2.65
29,953,068 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1, 5.949%
due 11/25/2022 30,701,895 30,664,453 6.88
Resolution Trust Corporation, REMIC (a):
10,000,251 92-4-B2, 5.754% due 7/25/2028 10,102,501 10,150,255 2.28
14,701,975 91-M6-A3, 6.25% due 6/25/2021 15,100,793 14,881,155 3.34
3,367,055 91-M7-A3, 6.517% due 1/25/2021 3,377,577 3,419,665 0.77
43,726,037 91-M2-A1, 6.757% due 9/25/2020 43,743,134 45,229,120 10.14
22,404,004 91-M2-A3, 6.825% due 9/25/2020 22,460,013 23,174,141 5.20
5,579,132 92-6-B4, 7.533% due 11/25/2025 5,716,607 5,687,227 1.27
15,311,901 Sears Mortgage Securities Corporation,
REMIC (a) 92-11-A1, 5.554% due 6/25/2022 15,466,145 15,421,955 3.46
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Index Amount Issue Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Cost of Funds $ 11,374,240 DLJ Mortgage Acceptance Corp., REMIC (a)
Mortgage-Backed Indexed 91-6-A1, 7.825% due 9/01/2021 $ 11,637,270 $ 11,672,814 2.62%
Obligations** Obligations Federal National Mortgage Association:
(concluded) 28,091,882 5.076% due 5/01/2018 28,861,362 28,574,711 6.41
9,775,081 5.085% due 3/01/2018 10,104,990 9,943,090 2.23
1,423,862 5.75% due 7/01/2017 1,479,815 1,459,013 0.33
11,924,203 5.75% du1e 10/01/2028 12,392,786 12,218,581 2.74
11,608,124 5.75% due 2/01/2029 12,064,287 11,894,699 2.67
2,587,733 Kidder Peabody Acceptance Corporation I,
REMIC (a) 88-04-A, 6.698% due 1/01/2019 2,681,538 2,587,733 0.58
3,204,443 Mortgage Participation Securities, First
Nationwide Trust, CMO (b) 88-1-A, 5.808%
due 10/25/2018 3,308,587 3,204,443 0.72
Resolution Trust Corporation, REMIC (a):
9,548,986 91-M6-A2, 5.679% due 6/25/2021 9,723,958 9,710,125 2.18
18,989,704 91-M2-A2, 7.552% due 9/25/2020 19,065,331 19,642,475 4.40
London Interbank 157,925 Federal Home Loan Mortgage Corporation,
Offered Rate REMIC (a) 92-1363-C, 47.00% (c)
Indexed due 8/15/2022 1,881,721 1,302,882 0.29
Obligations Federal Home Loan Mortgage Corporation:
19,900,000 3.706% due TBA (f) 20,431,703 20,571,625 4.61
6,000,000 3.748% due TBA (f) 6,156,563 6,156,563 1.38
8,237,193 Fund America Investors Corporation II,
REMIC (a) 93-K-F, 5.687% due 1/25/2023 8,237,193 8,237,193 1.85
Resolution Trust Corporation, REMIC (a):
4,600,000 91-M4-B, 5.437% due 2/25/2020 4,597,124 4,658,937 1.04
6,508,565 91-M7-B, 5.437% due 1/25/2021 6,508,566 6,585,855 1.48
15,000,000 92-C1-B, 5.437% due 8/25/2023 14,446,875 15,140,625 3.40
27,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 5.560% due 11/25/2022 27,620,000 27,911,250 6.26
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 397,447,777 399,890,156 89.68
<PAGE>
Fixed Rate 39,099,702 Capstead Mortgage Securities Corporation II,
Mortgage-Backed REMIC (a) 93-I-A3, 12.013% (d) due 9/25/2023
Obligations** (e) 560,291 525,402 0.12
2,831,021 Citicorp Mortgage Securities Inc., REMIC (a)
92-12-A3, 8.00% due 3/25/2021 2,880,873 2,838,983 0.64
37,391 Collateralized Mortgage Securities Corp.,
REMIC (a) 90-5-L, 11.981% (c) due 9/20/2020 871,259 486,086 0.11
83,817,140 DLJ Mortgage Acceptance Corp., REMIC (a)
92-6-A1, 14.753% (d) due 7/25/2022 (e) 1,439,490 1,223,730 0.27
Federal National Mortgage Association,
REMIC (a):
49,271 91-G-46-K, 9.00% (c) due 12/25/2009 1,818,506 1,091,348 0.24
8,332 90-142-K, 10.99% (c) due 7/25/2014 258,976 49,160 0.01
5,039,627 Federal National Mortgage Association
Trust 32-2, 8.46% (d) due 4/01/2018 (e) 3,553,702 916,582 0.20
8,544,816 Kidder Peabody Acceptance Corporation,
REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 8,507,851 8,630,264 1.94
Prudential Home Mortgage Securities Company,
Inc., REMIC (a):
24,154,792 93-44-A2, 6.75% due 10/25/2023 24,605,666 24,388,792 5.47
574 92-1-A9, 13.00% (c) due 2/25/2022 108,857 44,791 0.01
38,559,174 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 14.00% (d) due
2/25/2007 (e) 2,233,768 115,678 0.03
9,578,757 Resolution Trust Corporation, REMIC (a)
92-CHF-B, 7.15% due 12/25/2020 9,697,428 9,746,386 2.19
Sears Mortgage Securities Corp., REMIC (a):
5,346 91-KA4, 18.00% (c) due 9/25/2021 784,270 860,740 0.19
70,832,890 92-12-A3, 18.00% (d) due 7/25/2022 (e) 916,312 1,018,223 0.23
Total Investments in Fixed Rate
Mortgage-Backed Obligations 58,237,249 51,936,165 11.65
Total Investments in Mortgage-Backed
Obligations 455,685,026 451,826,321 101.33
US Government 8,000,000 US Treasury Note, 4.75% due 2/15/1997 7,988,125 7,938,720 1.78
& Agency
Obligations
Total Investments in US Government &
Agency Obligations 7,988,125 7,938,720 1.78
Total Investments in Mortgage-Backed &
US Government & Agency Obligations 463,673,151 459,765,041 103.11
<PAGE>
Short-Term Repurchase 7,216,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 2/28/1994 to yield 3.45% to
3/01/1994 7,216,000 7,216,000 1.62
Total Short-Term Securities 7,216,000 7,216,000 1.62
Total Investments $470,889,151 466,981,041 104.73
============
Liabilities in Excess of Other Assets (21,083,941) (4.73)
------------ ------
Net Assets $445,897,100 100.00%
============ ======
Net Asset Value: Class A--Based on net assets of $25,117,721 and 2,585,349 shares
outstanding $ 9.72
============
Class B--Based on net assets of $420,779,379 and 43,289,811 shares
outstanding $ 9.72
============
<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 original maturity.
***Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
(a) Real Estate Mortgage Investment Conduits (REMIC).
(b) Collateralized Mortgage Obligation (CMO).
(c) 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 amortiza-
tion, due to prepayments, reduces considerably the net interest income
earned on these securities.
(d) Represents the approximate yield to maturity.
(e) Represents the interest only portion of a mortgage-backed obligation.
(f) Represents a "to-be-announced" (TBA) transaction. The Fund has
committed to purchasing securities for which all specific information
is not available until settlement date.
</TABLE>
