MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
February 28, 1998
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
<PAGE>
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
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., February 28, 1998
DEAR SHAREHOLDER
Economic Environment
During the quarter ended February 28, 1998, the US economy continued
on its course of strong growth coupled with low inflation. Led by a
surge in exports and the second largest inventory buildup in
history, 1997 fourth quarter gross domestic product (GDP) rose 3.9%,
up from its 3.1% pace in the third quarter. Furthermore, inflationary
pressures continued to subside. Through February, the consumer
price index rose just 1.4%, while the producer price index fell
1.7% over the past year.
Many sectors of the economy remain vibrant. Sales of new homes and
existing homes remain solid as a result of low interest rates, and
employment is growing. Over the four months ended February 28, 1998,
non-farm payrolls have increased by an average of 367,000 per month
versus 282,000 per month over the previous 12 months. As a result,
personal incomes are rising. Over the three months ended January 31,
1998, personal income rose at a 7.2% annual rate. Consequently,
consumer confidence increased to its highest level in 30 years.
Manufacturing activity has shown few signs of slowing down as a
result of the Asian financial crisis. The National Association of
Purchasing Managers Index rose to 53.3 in February (a reading over
50 indicates an expansion in manufacturing), with significant gains
in the new orders and production components of the Index.
Although Federal Reserve Board monetary policy remained unchanged
during the quarter, the US economy is in the midst of a tug-of-war
between the Asian financial crisis and the momentum of strong
domestic demand. In his February Humphrey-Hawkins testimony, Federal
Reserve Board Chairman Alan Greenspan outlined three scenarios which
could influence future Federal Open Market Committee policy. First,
the growth in employment has pushed the demand for workers above the
supply of skilled labor. If the Asian turmoil can slow the US
economy enough to bring the balance of supply and demand in the
labor market back into line, inflationary pressures should remain
contained. In this scenario, the Federal Reserve Board would likely
leave monetary policy unchanged. Second, if the momentum of domestic
spending is not offset by the economic fallout from Asia,
inflationary pressures could intensify. In this scenario, the
Federal Reserve Board would likely raise interest rates to contain
an overheating economy. Finally, if the Asian crisis has more of a
negative impact on the US economy than is desirable or if
deflationary pressures intensify, the Federal Reserve Board would
likely lower interest rates to stimulate growth.
While the effects of the Asian financial crisis have yet to have a
major impact on the US economy, we expect a decline in US exports to
act as a drag on GDP growth in the first half of 1998. In the
meantime, with inflation subdued, we look for monetary policy to
remain unchanged over the near term as the Federal Reserve Board
further assesses the effects of the Asian financial crisis and
domestic demand on the US economy.
<PAGE>
Portfolio Matters
The combination of lower inflation and investor speculation that the
Asian financial crisis would soften economic growth in the United
States caused interest rates to fall during the quarter ended
February 28, 1998. The one-year US Treasury bill fell 11 basis
points (0.11%) to 5.39%, while the 30-year US Treasury bond fell 12
basis points to 5.92% at the close of February. As interest rates
fell, the US Treasury yield curve narrowed further. The yield spread
between 3-month US Treasury bills and 30-year Treasury bonds
tightened to 61 basis points. As a result, adjustable rate mortgage
(ARM) prepayment expectations escalated, causing ARM yield spreads
to widen and prices to decline once again. ARM prepayments typically
rise in a narrow yield curve environment, as fixed-rate mortgages
become more advantageous relative to adjustable rate mortgages for
homeowners.
During the quarter ended February 28, 1998, the Mortgage Bankers
Association refinance index rose to an all-time high. Although we
expect ARM prepayments to increase, we anticipate the bulk of the
increase to come from recently issued ARMs and moderately seasoned
ARMs (those which were originated less than 4 years ago). Our
strategy of holding seasoned ARMs (those originated over 5 years
ago) because of their superior prepayment characteristics should
benefit the Fund in this environment. Seasoned ARMs are typically
less interest rate sensitive because of the fact the underlying
mortgage holders have had numerous opportunities to refinance their
ARMs in the past. At the close of the quarter, 90% of the Fund's
ARMs were seasoned. We also increased our holding of London
Interbank Offered Rate (LIBOR)-indexed ARMs during the past three
months. Over the past six months, LIBOR has yielded 30 basis points
- --40 basis points more than the one-year Treasury index.
Looking ahead, the outlook for ARMs is extremely positive. First,
after peaking in mid-January, the Mortgage Bankers Association
refinance index has since fallen by 50% at the end of February. As a
result, we expect ARM yield spreads to narrow and prices to rise as
investors redefine their prepayment forecasts. Second, prepayments
have caused the amount of ARMs outstanding to decrease. Since nearly
95% of current mortgage originations are fixed-rate mortgages,
according to the Federal Home Loan Mortgage Corp., we expect the
overall supply of ARMs to fall. Consequently, we expect the demand
for ARMs to remain unchanged as investors seek to replace their
prepaid assets. As a result, the supply and demand imbalance should
force ARM yield spreads to tighten and prices to increase. Our
investment strategy going forward will continue to emphasize
seasoned ARMs for their overall stability. However, as opportunities
present themselves we will look to take advantage of any yield
spread tightening. In any event, we remain committed to achieving
the highest possible yields while seeking to limit net asset value
fluctuations.
<PAGE>
In Conclusion
We thank you for your continued investment in Merrill Lynch
Adjustable Rate Securities Fund, Inc., and we look forward to
discussing 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
Senior Vice President and
Portfolio Manager
March 25, 1998
Merrill Lynch Adjustable Rate Securities Fund, Inc., February 28, 1998
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. However, in the case of certain
eligible investors, the shares were simultaneously exchanged for
Class A Shares.
<PAGE>
* 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. Figures shown in the "Average Annual Total
Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date.
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.
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since Standardized
12 Month 3 Month Inception 30-day Yield
Total Return Total Return Total Return As of 2/28/98
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +6.32% +1.61% +25.32% 5.86%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +5.39 +1.41 +32.39 5.33
ML Adjustable Rate Securities Fund, Inc. Class C Shares +5.25 +1.40 +21.58 5.29
ML Adjustable Rate Securities Fund, Inc. Class D Shares +5.83 +1.44 +36.77 5.62
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. The
Fund's inception dates are: Class A and Class C Shares, 10/21/94;
and Class B and Class D Shares, 8/2/91.
<PAGE>
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/97 +6.35% +2.09%
Inception (10/21/94) through 12/31/97 +6.99 +5.63
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/97 +5.53% +1.53%
Five Years Ended 12/31/97 +4.46 +4.46
Inception (8/2/91) through 12/31/97 +4.33 +4.33
[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 12/31/97 +5.49% +4.49%
Inception (10/21/94) through 12/31/97 +6.06 +6.06
[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>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/97 +6.08% +1.84%
Five Years Ended 12/31/97 +5.00 +4.15
Inception (8/2/91) through 12/31/97 +4.87 +4.20
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., February 28, 1998
<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 of Federal National Mortgage
Mortgage-Backed Deposit Indexed Association:
Obligations** Obligations $ 2,122,915 #131221, 7.20% due 9/01/2021 $ 2,187,547 $ 2,191,247 1.88%
1,694,520 #138541, 7.20% due 12/01/2021 1,746,384 1,735,295 1.49
3,602,765 #307622, 7.635% due 4/01/2023 3,705,055 3,768,276 3.23
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,816,598 #645073, 7.731% due 5/01/2015 1,847,253 1,890,085 1.62
3,723,849 #840032, 7.389% due 1/01/2019 3,880,263 3,868,148 3.32
3,251,883 #606108, 7.814% due 9/01/2019 3,315,962 3,421,599 2.94
2,207,049 #755194, 7.131% due 3/01/2020 2,212,949 2,279,131 1.96
64,543 #785173, 7.589% due 8/01/2020 66,036 66,198 0.06
2,431,562 #845139, 7.86% due 3/01/2022 2,467,954 2,555,425 2.19
4,335,826 #845535, 7.878% due 10/01/2023 4,418,147 4,517,930 3.88
6,610,238 #755170, 7.586% due 8/01/2031 6,833,333 6,857,064 5.88
Federal National Mortgage
Association:
6,215,146 #70169, 7.329% due 12/01/2018 6,480,285 6,436,560 5.52
3,436,659 #142069, 7.25% due 12/01/2021 3,507,540 3,563,403 3.06
2,102,049 #139312, 7.655% due 12/01/2021 2,191,952 2,203,872 1.89
1,231,817 #181278, 7.524% due 9/01/2022 1,262,541 1,272,621 1.09
3,536,056 #200009, 7.575% due 2/01/2023 3,548,828 3,697,407 3.17
4,525,175 #291252, 8.049% due 8/01/2024 4,582,567 4,761,344 4.09
641,810 #309653, 7.239% due 5/01/2025 656,843 656,752 0.56
1,079,325 #324905, 7.774% due 9/01/2025 1,090,193 1,118,198 0.96
5,772,280 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.093% due 11/25/2022 5,916,587 5,883,385 5.05
<PAGE>
Cost of Funds 2,977,004 DLJ Mortgage Acceptance Corp.,
Indexed Obligations REMIC (a) 91-6-A1, 7.823% due
9/25/2021 3,027,938 2,973,283 2.55
London Interbank 4,297,913 Federal National Mortgage
Offered Rate Indexed Association, #305729, 7.937% due
Obligations 2/01/2025 4,424,547 4,457,065 3.82
15,005,712 Resolution Trust Corporation,
REMIC (a) 92-C1-B, 7.75% due
8/25/2023 14,452,635 15,005,712 12.88
10,196,225 Resolution Trust Corporation,
REMIC (a) 92-C8-A2, 7.037% due
12/25/2023 10,262,312 10,259,951 8.80
6,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B,
7.885% due 11/25/2022 6,119,667 6,036,960 5.18
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 100,205,318 101,476,911 87.07
Derivative 11,381,598 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-2I-A3,
Obligations**-- 0.50% due 9/25/2023 181,721 96,607 0.08
Interest Only (b) 45,216,705 DLJ Mortgage Acceptance Corp.,
REMIC (a) 92-6-A1, 0.6447% due
7/25/2022 675,895 225,224 0.19
64,729 Federal Home Loan Mortgage
Corporation, REMIC (a)(c)
92-1363-C, 333% due 8/15/2022 1,100,367 569,755 0.49
35 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 10,883 3,925 0.00
Sears Mortgage Securities Corp.,
REMIC (a):
3,286 91-K-A4, 5,718% due 9/25/2021 437,869 301,251 0.26
24,469,048 92-12-A3, 0.49% due 7/25/2022 285,533 252,337 0.22
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 2,692,268 1,449,099 1.24
Fixed Rate 2,753,185 Resolution Trust Corporation,
Mortgage-Backed REMIC (a) 92-CHF-B, 7.15% due
Obligations** 12/25/2020 2,785,309 2,737,268 2.35
Total Investments in Fixed Rate
Mortgage-Backed Obligations 2,785,309 2,737,268 2.35
Total Investments in
Mortgage-Backed Obligations 105,682,895 105,663,278 90.66
<PAGE>
US Government 6,000,000 United States Treasury Notes,
Obligations 5.50% due 2/29/2000 5,994,375 5,995,320 5.14
Total Investments in
US Government Obligations 5,994,375 5,995,320 5.14
Short-Term Repurchase 10,511,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 2/27/1998 to
yield 5.64% to 3/02/1998 10,511,000 10,511,000 9.02
Total Short-Term Securities 10,511,000 10,511,000 9.02
Total Investments $122,188,270 122,169,598 104.82
============
Liabilities in Excess of Other Assets (5,615,637) (4.82)
------------ -------
Net Assets $116,553,961 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $1,009,210 and
104,719 shares outstanding $ 9.64
============
Class B--Based on net assets of $89,319,739 and
9,295,413 shares outstanding $ 9.61
============
Class C--Based on net assets of $5,712,935 and
594,474 shares outstanding $ 9.61
============
Class D--Based on net assets of $20,512,077 and
2,135,690 shares outstanding $ 9.60
============
<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 under-lying 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>
<PAGE>
