MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
August 31, 1995
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.
<PAGE>
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
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
90 Washington Street, 12th Floor
New York, New York 10286
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
After raising interest rates seven consecutive times since February
1994 to temper above-average economic growth, the Federal Reserve
Board lowered interest rates at its July Federal Open Market
Committee meeting. Federal Reserve Board chairman Alan Greenspan
lowered the Federal Funds rate 25 basis points (0.25%) to 5.75%
because inflationary pressures had receded enough to accommodate a
modest adjustment in monetary conditions. The widely anticipated
reduction in interest rates prompted a rally in the bond markets
amid speculation of a continued decline in economic growth followed
by further reductions of interest rates.
Gross domestic product (GDP) rose just 1.1% in the second quarter of
1995, down from 2.7% in the first quarter and down significantly
from its 4.1% pace in 1994. Much of the decline in second-quarter
growth is attributable to a correction of inventory levels and slack
consumer demand. Rapid expansion and high levels of industrial and
manufacturing output in late 1994 caused a decrease in 1995
production schedules so that the buildup of business inventories
could be gradually reduced. Capacity utilization rates fell for the
seventh consecutive month in July, while non-farm payrolls grew by a
monthly average of just 65,000 jobs in the second quarter after
averaging 294,000 new jobs in 1994. In addition, consumers continue
to be inundated with high debt, forcing them to pare down their
spending habits. Through August, retail sales have grown at just a
3.8% annualized rate in 1995, down sharply from a 7.0% rate in 1994.
Nevertheless, interest rate volatility increased, as investors
assessed whether the economy is headed toward a recession or a soft
landing scenario.
<PAGE>
Despite volatile economic growth during the last 12 months,
inflation continues to remain subdued. Through August 31, 1995, the
core consumer price index (CPI) rose at an annualized rate of 2.4%
over the previous four months and just 2.9% over the last year, the
lowest rate of core inflation in 30 years. More importantly, labor
costs have continued to remain low and stable. Since 1957, yearly
CPI inflation has changed by more than 2% only five times. Of those
five times, four changes were caused by oil price increases of more
than 20%. The fifth change occurred in 1979 when labor costs were
rising above 6% a year. Through the first six months of 1995, the
employment cost index rose to a 2.9% annualized rate after rising
3.0% in 1994.
While not indicative of robust growth, recent data point to an
improving economic picture for the third quarter of 1995. Inventory
levels have fallen steadily while non-farm payrolls rose 249,000 in
August. In addition, declining interest rates in 1995 are beginning
to take hold in the housing market. Existing home sales rose 7.0%
and 5.0% on a monthly basis in June and July, respectively, while
new housing starts rose 7.0% in July. Although third-quarter GDP
should be modestly higher, we do not expect a strong economic trend
to develop. Instead, we foresee continued moderate growth coupled
with restrained inflationary pressures. In addition, there still
exists the possibility of further interest rate reductions by the
Federal Reserve Board should economic activity and inflation remain
temperate, as real short-term interest rates are still historically
high.
Portfolio Matters
During the quarter ended August 31, 1995, there was a marked change
in the shape of the US Treasury yield curve. Yields of US Treasury
notes and bonds were virtually unchanged, while US Treasury bill
yields declined 16 basis points--36 basis points, causing the yield
curve to slightly steepen. At the close of the August quarter, the
spread between the one-year Treasury bill and the 30-year Treasury
bond stood at 102 basis points. The decline in short-term yields
primarily reflected investors' belief of continued easing of
monetary policy by the Federal Reserve Board.
<PAGE>
In the adjustable rate mortgage securities (ARMS) market, prepayment
concerns became a reality. ARMS yield spreads widened 15 basis
points--20 basis points, as investors evaluated the affects of
faster prepayments on premium priced ARMS. While prepayments of ARMS
increased, they remain well below the peak levels attained in 1992
and 1993.
We expect the current prepayment phenomenon to subside and yield
spreads to tighten for two primary reasons. First, because of
the 110 basis point--150 basis point decline of short-term interest
rates in 1995, future increases in ARM interest rate adjustments
will be limited. Therefore, homeowner payment shock should be
limited as mortgage payment changes become modest. This should
limit the incentive of ARM holders from entering into a massive
refinancing mode. In addition, the Treasury yield curve remains
historically flat. A relatively flat yield curve provides fewer
attractive mortgage refinancing alternatives such as last seen in
the 1992--1993 steep curve environment. Second, as the fall and
winter months approach, mortgage origination tends to slacken. In an
environment where ARM origination is already historically low,
further diminished supply should pressure ARM yield spreads to
narrow and prices to rise.
Despite declining interest rates and a resurgence in prepayments,
the Fund maintained a relatively stable dividend accrual in 1995.
Our investment strategy consisted of remaining highly invested in
ARMS (90%), which have continued to reset upward in 1995, and
purchasing ARMS at lower dollar prices has allowed us to maintain
yield stability. In the upcoming months, we will continue to remain
invested in a high percentage of ARMS, emphasizing market liquidity.
Should ARM spreads begin to tighten, we will selectively begin
taking capital gains by selling some of our higher-coupon ARMS and
reinvesting the proceeds in lower-coupon/lower dollar-priced ARMS to
seek to provide future net asset value support.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
<PAGE>
September 21, 1995
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been 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, which, in the case of certain
eligible investors, 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 10 years.
* 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).
Performance data for the Fund's Class B and Class D Shares are
presented in the "Performance Summary" and "Average Annual Total
Return" tables on pages 4 and 5. Data for Class A and Class C Shares
are presented in the "Aggregate Total Return" table on page 5. Data
for all of the Fund's shares are presented in the "Recent
Performance Results" table on pages 4 and 5.
<PAGE>
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class B and Class D
Shares for the 12-month and 3-month periods ended August 31, 1995
and for Class A and Class C Shares for the since inception and 3-
month periods ended August 31, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
None of the past results shown should 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. 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.
PERFORMANCE DATA (concluded)
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <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
1994 9.73 9.33 -- 0.386 -0.14
1/1/95--8/31/95 9.33 9.52 -- 0.338 +5.95
------
Total $1.802
Cumulative total return as of 8/31/95: +14.79%**
<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 D Shares***
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <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
1994 9.73 9.32 -- 0.435 +0.26
1/1/95--8/31/95 9.32 9.51 -- 0.368 +6.29
------
Total $2.001
Cumulative total return as of 8/31/95: +17.04%**
<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.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
8/31/95 5/31/95 8/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.52 $9.55 $9.46 +0.63% -0.31%
Class B Shares* 9.52 9.56 9.51 +0.11 -0.42
Class C Shares* 9.52 9.56 9.46 +0.63 -0.42
Class D Shares* 9.51 9.55 9.50 +0.11 -0.42
Class A Shares--Total Return* +6.23(1) +1.32(2)
Class B Shares--Total Return* +5.72(3) +1.01(4)
Class C Shares--Total Return* +5.52(5) +1.00(6)
Class D Shares--Total Return* +6.15(7) +1.14(8)
Class A Shares--Standardized 30-day Yield 6.00%
Class B Shares--Standardized 30-day Yield 5.46%
Class C Shares--Standardized 30-day Yield 5.43%
Class D Shares--Standardized 30-day Yield 5.74%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class A and Class C Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.493 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.155 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.507 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.136 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.429 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.135 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.556 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.149 per share ordinary
income dividends.
</TABLE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/95 +5.52% +1.52%
Inception (8/2/91) through 6/30/95 +3.36 +3.12
[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 Without % Return With
Sales Charge Sales Charge**
Class D Shares*
<PAGE>
Year Ended 6/30/95 +6.18% +1.94%
Inception (8/2/91) through 6/30/95 +3.90 +2.83
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through 6/30/95 +5.29% +1.08%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94) through 6/30/95 +4.61% +3.61%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**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> <S> <C> <C> <C>
Adjustable Constant Maturity $ 3,763,390 Bear Stearns Secured Investors,
Rate* Treasury Indexed Inc. II, Pass-Through 91-1-A, 8.323%
Mortgage- Obligations due 11/25/2021 $ 3,834,044 $ 3,782,207 1.91%
Backed Federal Home Loan Mortgage Corporation:
Obligations** 2,764,705 #645073, 7.809% due 5/01/2015 2,811,360 2,823,455 1.43
4,914,742 #606108, 7.825% due 9/01/2019 5,015,654 5,068,328 2.56
3,385,282 #755194, 7.509% due 3/01/2020 3,394,729 3,433,963 1.74
67,064 #785173, 8.163% due 8/01/2020 68,615 67,132 0.03
5,908,342 #845139, 7.685% due 3/01/2022 5,999,640 6,061,605 3.07
8,407,759 #845535, 7.805% due 10/01/2023 8,571,922 8,657,386 4.38
10,404,238 #755170, 7.978% due 8/01/2031 10,755,381 10,651,339 5.39
Federal National Mortgage Association:
600,232 #21041, 7.61% due 10/01/2013 617,489 597,267 0.30
2,138,090 #21059, 7.46% due 11/01/2013 2,199,560 2,135,417 1.08
1,377,181 #20293, 7.88% due 9/01/2015 1,416,775 1,370,378 0.69
6,112,631 #142069, 6.808% due 12/01/2021 6,238,704 6,172,779 3.12
6,048,290 #200009, 7.602% due 2/01/2023 6,070,817 6,177,761 3.13
12,170,498 #291252, 5.766% due 8/01/2024 12,327,979 12,566,039 6.36
5,000,000 #TBA, 5.62% due 9/01/2025 (d) 5,051,498 5,075,000 2.57
10,200,000 Government National Mortgage Association,
#8685, 6.50% due 8/20/2025 10,286,004 10,292,438 5.21
16,947,044 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
7.868% due 10/01/2022 17,370,720 17,285,985 8.75
5,579,390 Resolution Trust Corporation, REMIC
(a) 92-6-B4, 7.463% due 11/25/2025 5,716,865 5,600,313 2.83
Cost of Funds 6,293,852 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a) 91-6-A1, 7.80% due
Obligations 9/01/2021 6,401,536 6,244,681 3.16
1,138,510 Resolution Trust Corporation,
REMIC (a) 92-M3-A, 7.914% due
2/25/2020 1,098,662 1,097,239 0.56
London Interbank Federal National Mortgage Association:
Offered Rate 5,835,735 #307622, 7.592% due 4/01/2023 6,006,641 5,987,115 3.03
Indexed 3,826,515 #291256, 7.187% due 8/01/2024 3,901,058 3,936,527 1.99
Obligations 9,268,166 #305729, 6.987% due 2/01/2025 9,548,014 9,523,040 4.82
Resolution Trust Corporation, REMIC (a):
6,510,700 91-M7-B, 7.937% due 1/25/2021 6,510,700 6,575,807 3.33
15,005,286 92-C1-B, 7.937% due 8/25/2023 14,452,208 15,333,527 7.76
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 7.488% due 11/25/2022 12,270,781 12,060,000 6.10
Total Investments in Adjustable Rate 167,937,356 168,576,728 85.30
Mortgage-Backed Obligations
<PAGE>
Derivative 24,357,021 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-I-A3,
Obligations**-- 0.50% due 9/25/2023 349,307 175,078 0.09
Interest 81,906,462 DLJ Mortgage Acceptance Corp.,
Only (b) REMIC (a)92-6-A1, 0.65% due
7/25/2022 1,272,605 1,195,834 0.61
107,797 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 294.392%
due 2/25/2022 1,658,407 436,578 0.22
1,222 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due 7/25/2014 70,873 5,927 0.00
290 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,990% due 2/25/2022 34,898 70,819 0.04
23,373,382 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 0.50% due
1/01/2007 2,029,279 43,825 0.02
Sears Mortgage Securities Corp.,
REMIC (a):
5,998 91-K-A4, 5,869% due 9/25/2021 807,661 661,243 0.34
52,125,980 92-12-A3, 0.52% due 7/25/2022 650,785 456,102 0.23
Total Investments in Derivative
Mortgage-Backed Obligations--Interest
Only 6,873,815 3,045,406 1.55
Fixed Rate 8,395,557 Kidder Peabody Acceptance Corporation,
Mortgage- REMIC (a) 93-M1-A2, 7.15% due
Backed 4/25/2025 8,359,238 8,282,741 4.19
Obligations** 6,660,374 Resolution Trust Corporation,
REMIC (a) 92-CHF-B, 7.15% due
12/25/2020 6,741,245 6,647,885 3.36
Total Investments in Fixed Rate
Mortgage-Backed Obligations 15,100,483 14,930,626 7.55
Total Investments in Mortgage-
Backed Obligations 189,911,654 186,552,760 94.40
Short-Term Repurchase 15,262,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 8/31/1995 to
yield 5.84% to 9/01/1995 15,262,000 15,262,000 7.72
Total Short-Term Securities 15,262,000 15,262,000 7.72
Total Investments $205,173,654 201,814,760 102.12
============
Liabilities in Excess of Other Assets (4,181,974) (2.12)
------------ -------
Net Assets $197,632,786 100.00%
============ =======
<PAGE>
Net Asset Value: Class A--Based on net assets of $383,646 and 40,301
shares outstanding $ 9.52
============
Class B--Based on net assets of $182,771,143 and
19,199,233 shares outstanding $ 9.52
============
Class C--Based on net assets of $1,061,983 and 111,570
shares outstanding $ 9.52
============
Class D--Based on net assets of $13,416,014 and
1,409,987 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 original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Securities which receive some or all of the interest portion of
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(c)Adjustable rate coupon that resets inversely to changes in the
London Interbank Offered Rate.
(d)TBA--Security purchased on a to be announced basis.
</TABLE>
