MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
February 28, 1997
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.
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
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
Joseph T. Monagle Jr., 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
James W. Harshaw, 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
DEAR SHAREHOLDER
Economic Environment
In its sixth year of expansion, the US economy continues on a course
of moderate growth. Virtually all economic sectors show no sign of
excessive strengthening or weakening. Nevertheless, while the
current expansion has been noninflationary for some time now, tight
labor markets have skewed inflation risks to the upside. As such, in
a preemptive tightening, the Federal Reserve Board increased the
Federal Funds rate 25 basis points (0.25%) on March 25, 1997 to
5.50%.
Gross domestic product (GDP) rose a surprisingly strong 3.8% in the
fourth quarter of 1996. However, much of the strength was
attributable to an increase in net fourth quarter exports correct-
ing for a weak third quarter. Recent strengthening of the US dollar
compared to currencies abroad are expected to limit export growth in
the first quarter of 1997. As such, we expect GDP growth to decline
into a more modest 2.0%--2.5% range in the first quarter of 1997.
Real consumer spending increased at a 3.4% rate in the fourth
quarter, slightly above the 2.7% rate for all of 1996. The fourth
quarter rise reflected a 3.8% jump in spending for services.
However, this pickup should recede, as services spending rose at
just a 2.3% average annual rate during the current 1990 expansion.
Recently, we have seen that housing growth has tempered. New housing
starts, which ran at a 1.47 million unit pace in 1996, declined to a
1.41 million pace over the three-month period ended February 28,
1997. The National Association of Purchasing Managers (NAPM) Index
was reported at 52 in January, indicating a modest expansion. More
importantly, underlying data indicates no backlogs or building
inflationary pressures through various stages of production.
Nevertheless, consumer confidence still remains high. The consumer
confidence index was reported at 118.7 in January, its highest level
since July 1989.
Overall, inflation remains at its lowest rate in more than 30 years.
In 1996, the core consumer price index rose 2.5% while the core
producer price index rose just 0.6%. Regardless, the Federal Reserve
Board remains committed to restraining inflationary pressures and
future Federal Reserve Board policy remains contingent on future
events rather than on events that have already occurred. In his
Humphrey-Hawkins testimony before Congress, Federal Reserve Board
Chairman Alan Greenspan stated his concern that with the US economy
nearing full employment, future wage demands may "endanger the
maintenance of the low-inflation environment." Given those concerns,
the Federal Reserve Board decided in favor of a tightening of
monetary policy. While further tightening may or may not be
imminent, current monetary policy still remains somewhat restrictive
by historical standards. With the Federal Funds rate at 5.50% and
core inflation at 2.5%, the real Federal Funds rate is at 3.00%, or
a 125 basis points above the 40-year average and 95 basis points
above the 10-year average.
Portfolio Strategy
During the quarter ended February 28, 1997, US interest rates
increased as investors priced in the likelihood of a policy
tightening by the Federal Reserve Board. The one-year US Treasury
bill yield rose 32 basis points to 5.67%, while the 30-year US
Treasury bond yield rose 44 basis points to 6.80%. Despite the jump
in interest rates, the Fund's beginning and closing net asset values
were virtually unchanged during the February quarter. (Complete
performance information, including average annual total returns, can
be found on pages 3--5 of this report to shareholders.)
The adjustable rate mortgage securities (ARMS) market turned in an
exceptionally strong performance during the three-month period ended
February 28, 1997. Despite an unusually large amount of ARMS put up
for sale during the period (over $4.0 billion), demand forces
overwhelmed supply forces. As a result, ARM yield spreads narrowed
15 basis points--20 basis points causing ARM prices to rise 0.50%--
0.75%. While ARM prices rose and are approaching historical highs,
we strongly believe the ARM market still offers exceptional value
from both a fundamental and technical aspect. Fundamentally, ARMS
still enjoy substantial yield and cash flow advantages on a duration
adjusted basis, compared to short corporate securities and money
market alternatives. Technically, yield spreads and relative price
movements should remain firm because of the recent reintroduction of
ARM Real Estate Mortgage Investment Conduits (REMICs). ARM REMICs,
whereby ARM cash flows are structured into several classes each with
varying risk and return characteristics, have been met with
unprecedented investor demand. As a result, we expect to see
additional ARM REMICs created in 1997, providing an underlying
support level or possibly further narrowing ARM yield spreads. In
addition, ARM origination still remains approximately 20% of overall
mortgage origination. Low origination should help keep overall ARM
supply low and limit any over supply from widening ARM yield
spreads.
Our strategy going forward will focus on ARMS with outstanding cash
flow characteristics. We will continue to heavily emphasize the
seasoned ARMS sector, since its slower prepayment profile, which
enhanced the Fund's performance in 1996, may continue to benefit
returns in 1997. In addition, because of their lower effective
duration, seasoned ARMS should limit fluctuations in the Fund's net
asset values during a period of high interest rate volatility.
Finally, although we do not believe the current economic environment
warrants a further tightening of monetary policy, the current
portfolio structuring will be defensively biased.
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 with you in our upcoming annual
report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
March 26, 1997
As of December 31, 1996, N. John Hewitt retired as Senior Vice Presi-
dent of the Fund. His colleagues at Merrill Lynch Asset Management,
L.P. join the Fund's Board of Directors in wishing Mr. Hewitt well
in his retirement.
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:
* 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 approximately 10 years. (There is no initial
sales charge for automatic share conversions.)
* 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**
<S> <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
1996 9.53 9.63 -- 0.587 +7.42
1/1/97--2/28/97 9.63 9.63 -- 0.081 +1.02
------
Total $1.384
Cumuative total return as of 2/28/97: +17.88%**
</TABLE>
<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
1995 9.33 9.54 -- 0.533 +8.13
1996 9.54 9.60 -- 0.512 +6.16
1/1/97--2/28/97 9.60 9.61 -- 0.071 +1.00
------
Total $2.580
Cumulative total return as of 2/28/97: +25.61%***
</TABLE>
<TABLE>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change***
<S> <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
1996 9.54 9.61 -- 0.509 +6.23
1/1/97--2/28/97 9.61 9.62 -- 0.070 +0.99
------
Total $1.202
Cumulative total return as of 2/28/97: +15.51%***
</TABLE>
<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 -- 0.434 +0.26
1995 9.32 9.53 -- 0.582 +8.69
1996 9.53 9.60 -- 0.562 +6.82
1/1/97--2/28/97 9.60 9.61 -- 0.077 +1.08
------
Total $2.853
Cumulative total return as of 2/28/97: +29.24%**
<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 were redesignated to Class D Shares.
</TABLE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
2/28/97 11/30/96 2/29/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.63 $9.63 $9.52 +1.16% 0.00%
Class B Shares* 9.61 9.62 9.53 +0.84 -0.10
Class C Shares* 9.62 9.62 9.53 +0.94 0.00
Class D Shares* 9.61 9.61 9.52 +0.95 0.00
Class A Shares--Total Return* +7.54(1) +1.54(2)
Class B Shares--Total Return* +6.38(3) +1.24(4)
Class C Shares--Total Return* +6.45(5) +1.34(6)
Class D Shares--Total Return* +7.05(7) +1.48(8)
Class A Shares--Standardized 30-day Yield 5.84%
Class B Shares--Standardized 30-day Yield 5.34%
Class C Shares--Standardized 30-day Yield 5.28%
Class D Shares--Standardized 30-day Yield 5.61%
<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 $0.595 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.147 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.519 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.128 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.516 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.128 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.570 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.141 per share ordinary
income dividends.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/96 +7.42% +3.13%
Inception (10/21/94) through 12/31/96 +7.29 +5.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/96 +6.16% +2.16%
Five Years Ended 12/31/96 +3.92 +3.92
Inception (8/2/91) through 12/31/96 +4.11 +4.11
[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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/96 +6.23% +5.23%
Inception (10/21/94) through 12/31/96 +6.31 +6.31
[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 12/31/96 +6.82% +2.55%
Five Years Ended 12/31/96 +4.45 +3.61
Inception (8/2/91) through 12/31/96 +4.64 +3.86
[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 Rate* Certificate $ 4,412,760 Federal National Mortgage
Mortgage-Backed of Deposit Association, #307622, 7.401% due
Obligations** Indexed 4/01/2023 $ 4,539,599 $ 4,556,880 3.37%
Obligations
Constant Federal Home Loan Mortgage
Maturity Corporation:
Treasury 2,255,788 #645073, 7.769% due 5/01/2015 2,293,854 2,334,237 1.72
Indexed 4,089,767 #606108, 7.679% due 9/01/2019 4,171,722 4,275,074 3.16
Obligations 2,830,844 #775194, 7.212% due 3/01/2020 2,838,553 2,906,031 2.15
65,626 #785173, 7.416% due 8/01/2020 67,143 66,682 0.05
3,260,829 #845139, 7.957% due 3/01/2022 3,310,332 3,413,697 2.52
5,507,252 #845535, 7.838% due 10/01/2023 5,613,052 5,767,965 4.26
8,120,873 #755170, 7.718% due 8/01/2031 8,394,953 8,345,496 6.16
Federal National Mortgage
Association:
536,634 #21041, 6.93% due 10/01/2013 552,062 534,010 0.39
1,568,049 #21059, 7.29% due 11/01/2013 1,613,131 1,563,016 1.16
1,216,726 #20293, 7.37% due 9/01/2015 1,251,707 1,206,944 0.89
4,693,426 #142069, 7.261% due 12/01/2021 4,790,228 4,848,168 3.58
2,153,771 #181278, 7.339% due 9/01/2022 2,208,248 2,204,250 1.63
4,530,932 #200009, 7.563% due 2/01/2023 4,547,512 4,668,990 3.45
6,103,173 #291252, 7.99% due 8/01/2024 6,181,387 6,344,431 4.69
1,088,994 #309653, 7.22% due 5/01/2025 1,114,800 1,110,436 0.82
2,588,115 #324905, 7.322% due 9/01/2025 2,614,409 2,683,456 1.98
8,388,397 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.284% due 10/01/2022 8,598,107 8,566,651 6.33
Cost of Funds 3,936,707 DLJ Mortgage Acceptance Corp., REMIC
Indexed (a) 91-6-A1, 7.83% due 9/01/2021 4,004,062 3,973,614 2.94
Obligations
London 6,133,500 Federal National Mortgage Association,
Interbank #305729, 7.685% due 2/01/2025 6,316,002 6,348,173 4.69
Offered Rate Resolution Trust Corporation,
Indexed REMIC (a):
Obligations 6,510,813 91-M7-B, 7.50% due 1/25/2021 6,510,813 6,530,671 4.82
15,005,441 92-C1-B, 7.75% due 8/25/2023 14,452,363 15,017,164 11.09
12,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B, 7.879%
due 11/25/2022 12,250,508 12,150,000 8.97
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 108,234,547 109,416,036 80.82
Derivative 15,295,128 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-2I-A3,
Obligations**-- 0.50% due 9/25/2023 230,506 76,476 0.06
Interest Only (b) 63,206,695 DLJ Mortgage Acceptance Corp., REMIC
(a) 92-6-A1, 0.641% due 7/25/2022 899,871 644,708 0.48
79,335 Federal Home Loan Mortgage
Corporation, REMIC (a)(c) 92-1363-C,
371% due 8/15/2022 1,304,123 661,653 0.49
124 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 24,475 16,892 0.01
Sears Mortgage Securities Corp.,
REMIC (a):
4,185 91-K-A4, 5,832% due 9/25/2021 554,966 395,504 0.29
33,133,676 92-12-A3, 0.51% due 7/25/2022 381,149 367,577 0.27
Total Investments in Derivative
Mortgage-Backed Obligations--Interest
Only 3,395,090 2,162,810 1.60
Fixed Rate 4,144,214 Resolution Trust Corporation, REMIC
Mortgage-Backed (a) 92-CHF-B, 7.15% due 12/25/2020 4,193,393 4,145,509 3.06
Obligations**
Total Investments in Fixed Rate
Mortgage-Backed Obligations 4,193,393 4,145,509 3.06
Total Investments in Mortgage-Backed
Obligations 115,823,030 115,724,355 85.48
US Government United States Treasury Notes:
Obligations 7,000,000 6.125% due 8/31/1998 6,969,922 7,016,380 5.18
7,000,000 6% due 8/15/1999 6,923,984 6,971,580 5.15
Total Investments in US Government
Obligations 13,893,906 13,987,960 10.33
Short-Term Repurchase 5,423,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 2/28/1997 to yield 5.37%
to 3/03/1997 5,423,000 5,423,000 4.01
Total Short-Term Securities 5,423,000 5,423,000 4.01
Total Investments $135,139,936 135,135,315 99.82
============
Other Assets Less Liabilities 245,284 0.18
------------ -------
Net Assets $135,380,599 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $827,837 and
85,940 shares outstanding $ 9.63
============
Class B--Based on net assets of $114,013,405
and 11,862,695 shares outstanding $ 9.61
============
Class C--Based on net assets of $7,119,755 and
740,438 shares outstanding $ 9.62
============
Class D--Based on net assets of $13,419,602 and
1,397,107 shares outstanding $ 9.61
============
<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>
