MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
February 29, 1996
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.
<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
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, 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
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
DEAR SHAREHOLDER
Economic Environment
The US economy continued to exhibit signs of weakness during the
three months ended February 29, 1996. Gross domestic product (GDP)
was reported up just 0.9% in the fourth quarter of 1995, after
rising 3.6% in the third quarter. For all of 1995, GDP rose just
1.4%, well below the US economy's long-term non-inflationary growth
potential, estimated at 2.0%--2.5%. In December 1995, the US
Department of Commerce revised its measure of GDP by replacing its
fixed-weight measure with a new chain-weighted GDP measure. The new
chain measure uses current and prior year prices to calculate GDP,
rather than fixed prices. As a result, it provides a more accurate
gauge of output trends. Much of the economic sluggishness in the
fourth quarter is attributable to the consumer sector, which
accounts for nearly two-thirds of GDP. Real consumer spending rose
just 0.8% in the fourth quarter and just 1.9% for all of 1995.
Preliminary data indicate consumer spending is likely to remain weak
into 1996, as consumers continue to be income and debt constrained.
Other areas of the economy also continued to be weak. The industrial
sector still is mired in near-recessionary conditions. The National
Association of Purchasing Managers Index rose to 45.2 in February,
but stayed below 50 for the seventh consecutive month. An index
below 50 is indicative of a contraction in the manufacturing sector.
In addition, capacity utilization rates fell for the fifth
consecutive month to 82.1% in January, its lowest rate in 26 months.
The Index of Leading Economic Indicators, a broad measure of overall
economic activity, fell 0.5% in January, the ninth decline in the
past 12 months. As a result, the Federal Reserve Board, citing "a
moderating economic expansion and reduced inflationary pressures,"
lowered interest rates at both its December and February Federal
Open Market Committee meetings. Despite lowering the Federal Funds
rate to 5.25%, monetary policy still appears to be somewhat
restrictive. At 5.25%, the Federal Funds rate still remains
approximately 275 basis points (2.75%) above the inflation rate, or
100 basis points higher than its long-term average of 175 basis
points, leaving room for additional easing by the Federal Reserve
Board.
<PAGE>
Despite overall slow economic growth, intermediate-term and long-
term interest rates rose during the past three months, as the
financial markets reacted negatively to two events. First, housing
starts were reported to have risen 4.4% in January despite severe
weather-related effects. However, a closer look reveals most of the
pickup reflected an 18% jump in multi-unit dwellings. On the other
hand, single-family housing starts were relatively flat over the
last seven months, despite falling mortgage rates. Second, in his
February 1996 Humphrey-Hawkins testimony before the US Senate
Banking Committee, Federal Reserve Board Chairman Alan Greenspan
downplayed the risk of recession and asserted that the current
weakness in the economy was temporary. Bond investors pushed
interest rates higher, believing the Federal Reserve Board will
refrain from additional interest rate cuts. The same scenario
occurred six months ago, as the bond market reacted negatively
following Greenspan's July 1995 Humphrey-Hawkins testimony. However,
two months later the bond market rebounded with yields declining to
new 1995 lows. While we believe there are signs that economic growth
will pick up later in 1996 primarily in response to the reduction of
business inventories in 1995, it is unlikely a robust expansion will
take place. Consumer spending will probably remain sluggish since
consumer indebtedness is at an all-time high and wage growth remains
weak.
Portfolio Strategy
Interest rate volatility rose during the three-month period ended
February 29, 1996 as mixed economic data created conflicting views
within the financial markets. During the quarter ended February 29,
1996, the US Treasury yield curve steepened as three-month Treasury
bill yields fell 0.47% to 5.01%, while 30-year Treasury bond yields
rose 0.34% to 6.47%. Despite the volatility, adjustable rate
mortgage securities (ARMS) performed well as prepayment speeds began
to decrease. Prepayment speeds are expected to continue to decline,
barring a sudden spike in short-term interest rates or a sharp drop
in long-term interest rates, as ARM coupons reset further downward.
In addition, a steep yield curve environment is less advantageous
for refinancing an ARM into a fixed-rate mortgage, further reducing
the prepayment options of ARMS.
The outlook remains favorable for ARMS. Should prepayment speeds
slow as we expect, ARM spreads are likely to narrow and prices are
likely to rise. More important, ARM supply is declining. Falling
interest rates in 1995 caused ARM originations to decline, as
homeowners opted for fixed-rate mortgages. After averaging $5.4
billion per month in 1995, total ARM issuance in January 1996 fell
to just $3.5 billion, the lowest level since May 1993. While limited
ARM supply does not necessarily mean ARM prices will rise, it can
act as a cushion against downside price risk.
<PAGE>
Our investment strategy continues to emphasize investments in high-
coupon, high-cap ARMS while seeking attractive market yields in
addition to limiting net asset value volatility. In a steepening
yield curve environment, the forward curve (a predictor of future
interest rates) rises, implying higher future interest rates. In
such a scenario, high-coupon, high-cap ARMS could help insulate the
portfolio against the negative effects resulting from the higher
option costs of rising cap prices. In addition, we continue to
stress quality and market liquidity. At the close of the February
quarter, we held nearly 60% of the Fund's assets in US Government
agency securities.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
March 29, 1996
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:
<PAGE>
* 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).
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 A Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.110 -0.21%
1995 9.33 9.53 -- 0.606 +8.86
1/1/96--2/29/96 9.53 9.52 -- 0.072 +0.86
------
Total $0.788
Cumulative total return as of 2/29/96: +9.56%**
</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
1994 9.73 9.33 -- 0.386 -0.14
1995 9.33 9.54 -- 0.533 +8.13
1/1/96--2/29/96 9.54 9.53 -- 0.063 +0.77
------
Total $2.060
Cumulative total return as of 2/29/96: +18.06%***
</TABLE>
<TABLE>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change***
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.095 -0.37%
1995 9.33 9.54 -- 0.528 +8.08
1/1/96--2/29/96 9.54 9.53 -- 0.063 +0.76
------
Total $0.686
Cumulative total return as of 2/29/96: +8.50%***
</TABLE>
<TABLE>
Performance
Summary--
Class D 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
1994 9.73 9.32 -- 0.435 +0.26
1995 9.32 9.53 -- 0.582 +8.69
1/1/96--2/29/96 9.53 9.52 -- 0.069 +0.83
------
Total $2.284
<PAGE>
Cumulative total return as of 2/29/96: +20.69%**
<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.
***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 wereredesignated to Class D Shares.
</TABLE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
2/29/96 11/30/95 2/28/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.52 $9.53 $9.43 +0.95% -0.10%
Class B Shares* 9.53 9.53 9.44 +0.95 0.00
Class C Shares* 9.53 9.53 9.44 +0.95 0.00
Class D Shares* 9.52 9.52 9.43 +0.95 0.00
Class A Shares--Total Return* +7.54(1) +1.42(2)
Class B Shares--Total Return* +6.83(3) +1.33(4)
Class C Shares--Total Return* +6.66(5) +1.32(6)
Class D Shares--Total Return* +7.27(7) +1.46(8)
Class A Shares--Standardized 30-day Yield 6.21%
Class B Shares--Standardized 30-day Yield 5.71%
Class C Shares--Standardized 30-day Yield 5.66%
Class D Shares--Standardized 30-day Yield 5.97%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.604 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.145 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.530 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.127 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.525 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.579 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/95 +8.86% +4.50%
Inception (10/21/94) through 12/31/95 +7.17 +3.57
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/95 +8.13% +4.13%
Inception (8/2/91) through 12/31/95 +3.65 +3.65
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/95 +8.08% +7.08%
Inception (10/21/94) through 12/31/95 +6.39 +6.39
[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 12/31/95 +8.69% +4.34%
Inception (8/2/91) through 12/31/95 +4.15 +3.19
[FN]
*Maximum sales charge is 4%.
**Assuming maximum 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 Certificate of $ 5,398,209 Federal National Mortgage Association,
Rate* Deposit Indexed #307622, 7.635% due 4/01/2023 $ 5,555,410 $ 5,507,868 3.38%
Mortgage- Obligations
Backed
Obliga- Constant Maturity Federal Home Loan Mortgage
tions** Treasury Indexed Corporation:
Obligations 2,620,853 #645073, 7.806% due 5/01/2015 2,665,080 2,679,007 1.64
4,699,369 #606108, 7.934% due 9/01/2019 4,795,172 4,830,077 2.96
3,348,688 #755194, 7.487% due 3/01/2020 3,357,964 3,428,755 2.10
66,635 #785173, 8.012% due 8/01/2020 68,176 67,374 0.04
4,131,832 #845139, 7.874% due 3/01/2022 4,195,328 4,229,963 2.59
7,130,702 #845535, 7.99% due 10/01/2023 7,269,271 7,329,035 4.50
9,562,624 #755170, 7.629% due 8/01/2031 9,885,363 9,791,267 6.01
Federal National Mortgage
<PAGE> Association:
576,957 #21041, 6.89% due 10/01/2013 593,545 576,248 0.35
1,903,949 #21059, 6.64% due 11/01/2013 1,958,688 1,900,903 1.17
1,357,765 #20293, 6.46% due 9/01/2015 1,396,800 1,355,755 0.83
5,586,390 #142069, 6.819% due 12/01/2021 5,701,609 5,705,101 3.50
5,254,319 #200009, 7.59% due 2/01/2023 5,273,780 5,385,677 3.30
9,691,599 #291252, 7.75% due 8/01/2024 9,816,957 9,906,646 6.08
4,902,767 #324905, 5.947% due 9/01/2025 4,953,015 5,019,207 3.08
9,919,211 Government National Mortgage
Association, #8685, 6.50% due
8/20/2025 10,002,382 10,111,396 6.20
12,521,142 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.165% due 10/01/2022 12,834,170 12,726,567 7.81
Cost of Funds 5,494,985 DLJ Mortgage Acceptance Corp., REMIC
Indexed (a) 91-6-A1, 7.821% due 9/01/2021 5,589,001 5,460,642 3.35
Obligations 905,182 Resolution Trust Corporation, REMIC
(a) 91-M3-A, 8.382% due 2/25/2020 873,501 801,936 0.49
London Interbank 8,142,036 Federal National Mortgage Association,
Offered Rate Indexed #305729, 7.727% due 2/01/2025 8,386,834 8,360,854 5.13
Obligations Resolution Trust Corporation, REMIC (a):
6,510,813 91-M7-B, 7.625% due 1/25/2021 6,510,813 6,512,858 3.99
15,005,310 92-C1-B, 7.625% due 8/25/2023 14,452,231 15,164,741 9.30
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 7.913% due 11/25/2022 12,270,781 12,127,500 7.44
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 138,405,871 138,979,377 85.24
Derivative 20,988,850 Capstead Mortgage Securities
Mortgage- Corporation II, REMIC (a) 93-2I-A3,
Backed 0.50% due 9/25/2023 293,276 157,416 0.10
Obliga- 72,096,614 DLJ Mortgage Acceptance Corp., REMIC
tions**-- (a) 92-6-A1, 0.644% due 7/25/2022 1,098,098 973,304 0.60
Interest 96,486 Federal Home Loan Mortgage Corporation,
Only (b) REMIC (a)(c) 92-1363-C, 390% due
8/15/2022 1,539,407 540,322 0.33
580 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due
7/25/2014 64,264 1,565 0.00
225 Prudential Home Mortgage Securities
Company, Inc.,REMIC (a) 92-1-A9, 42,989%
due 2/25/2022 17,977 51,450 0.03
21,614,573 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 0.50% due
1/01/2007 1,971,911 32,638 0.02
Sears Mortgage Securities Corp.,
<PAGE> REMIC (a):
5,445 91-K-A4, 5,898% due 9/25/2021 735,206 601,691 0.37
44,113,612 92-12-A3, 0.52% due 7/25/2023 550,170 379,377 0.23
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 6,270,309 2,737,763 1.68
Fixed Rate 7,733,679 Kidder Peabody Acceptance Corporation,
Mortgage- REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 7,700,223 7,651,508 4.69
Backed 5,798,493 Resolution Trust Corporation, REMIC (a)
Obliga- 92-CHF-B, 7.15% due 12/25/2020 5,868,388 5,816,613 3.57
tions**
Total Investments in Fixed Rate
Mortgage-Backed Obligations 13,568,611 13,468,121 8.26
Total Investments in
Mortgage-Backed Obligations 158,244,791 155,185,261 95.18
Short-Term Repurchase 6,764,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 2/29/1996 to yield
5.41% to 3/01/1996 6,764,000 6,764,000 4.15
Total Short-Term Securities 6,764,000 6,764,000 4.15
Total Investments $165,008,791 161,949,261 99.33
============
Other Assets Less Liabilities 1,086,721 0.67
------------ -------
Net Assets $163,035,982 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $826,413 and
86,813 shares outstanding $ 9.52
============
Class B--Based on net assets of $148,002,861 and
15,534,527 shares outstanding $ 9.53
============
Class C--Based on net assets of $1,819,489 and
190,842 shares outstanding $ 9.53
============
Class D--Based on net assets of $12,387,219 and
1,300,917 shares outstanding $ 9.52
============
<PAGE>
<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.
</TABLE>
