MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
August 31, 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 datedand 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
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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 1998
DEAR SHAREHOLDER
During the quarter ended August 31, 1998, mounting global financial
concerns prompted an enormous flight to quality toward the US
Treasury market, pushing US Treasury bond yields to their lowest
levels in 30 years. The effects of the economic crisis in Asia began
to impact other regional economies as well. As a result,
deteriorating economic fundamentals in Russia caused the ruble to
decline by more than 90% and sharply increased the risks of
contagion in the emerging market economies of Latin America and
South America.
Despite heightened global economic turmoil, the US economy continued
to exhibit an impressive resiliency during the second quarter of
1998. US gross domestic product (GDP) rose 1.8% during the second
quarter, although there was a sharp reduction in inventory
accumulation and the worst trade deficit reported in US history,
which subtracted 2.1% from second-quarter GDP. Consumer spending,
which rose 5.8% in the second quarter, remains the driving force
behind US economic growth. Housing also continues to surge, as new
housing starts rose to a 1.71 million unit annual rate in July, the
highest level in more than 11 years. In addition, more single-family
homes are being built now than at any time since 1979. Retail sales
have also been strong and reflect the high volume of new home sales,
since the demand for furniture and appliances soared. Consequently,
retail sales (excluding automobile sales) rose at a robust 4.9%
annual rate over the three-month period ended July 31, 1998. Despite
strong consumer demand, inflationary pressures remain stagnant. The
consumer price index for August was up just 1.6% from a year ago,
while the producer price index for August fell 0.9% over the last
year.
As a result of a degenerating set of global economic fundamentals,
increased world stock market volatility put greater pressure on
global liquidity. Consequently, the risks of a future downturn in US
economic growth increased as the Asian region remains mired in a
recession. Deteriorating political and economic conditions forced
the Russian government to devalue its currency and default on its
debt payments in August, spurring a massive flight to quality toward
the US Treasury market and intensifying the global credit crunch by
raising the risk premium for all emerging market economies. In
addition, Canada raised interest rates in August to support its
weakening currency, which could slow economic activity. Since South
America, Latin America and Canada account for approximately 40% of
US exports, any extensive economic downturn in these regions could
depress future US economic growth.
In spite of the current reports of strong economic growth in the
United States, we believe the Federal Reserve Board has focused its
attention toward the deepening instability in the world's financial
markets and the resulting liquidity crunch. Ultimately, restrictive
financial conditions, coupled with deflationary forces, could
eventually hamper US economic growth prospects. As a result, we
believed the Federal Reserve Board could begin easing monetary
policy and lower interest rates (as the Federal Reserve Board did
lower the Federal Funds rate 25 basis points (0.25%) to 5.25% on
September 29, 1998). We would expect this scenario to provide
positive ramifications for the US bond market.
Portfolio Strategy
During the quarter ended August 31, 1998, the yield of the one-year
US Treasury bill declined 0.56% to 4.85%, while the yield of the 30-
year US Treasury bond fell 0.55% to 5.25%. Despite the US Treasury
market rally, adjustable rate mortgage securities (ARMS) yield
spreads widened and prices declined because of a widening of
interest rate swap spreads and a renewed fear of further increases
in ARMS prepayments. As global uncertainty increased, interest rate
swap spreads widened. Interest rate swaps involve the exchange of
fixed-rate payments against floating-rate payments, usually London
Interbank Offered Rate (LIBOR). Since swap spreads carry an element
of credit risk for large international banks, larger premiums (wider
spreads) are warranted for swapping cashflows with these
institutions that carry sizable loan exposure to emerging market
economies. Since many mortgage investors fund their mortgage assets
through LIBOR, widening swap spreads helped push mortgage yield
spreads wider during the period. As a result, ARMS yield spreads are
currently at their widest levels in over two years.
However, the ARMS market remained mired in a difficult environment.
As interest rates fell during the August quarter, the US Treasury
curve narrowed further. At the close of the period, the yield
difference between the three-month US Treasury bill (4.83%) and the
30-year US Treasury bond (5.25%) narrowed to 0.42%. A flattening
yield curve increases the refinancing incentive of ARMS, as fixed-
mortgage rates become more attractive relative to adjustable
mortgage rates. During the quarter, our investment strategy
gradually focused on reducing our ARMS holdings. As of August 31,
1998, the Fund's investment in ARMS stood at 77% of net assets, the
lowest in two years. In addition, we continued to predominately hold
"seasoned ARMS" as our core ARMS holdings. Seasoned ARMS, which are
ARMS that originated more than six years ago, still offer the
greatest form of prepayment protection in the ARMS market, and thus
offer significant yield advantages.
Looking ahead, several developments may benefit the ARMS market over
the final months of 1998. First, with ARMS yield spreads at their
widest levels in two years, investor interest in ARMS should be
rekindled by their high relative yields. Second, as a result of the
Federal Housing Administration reaching its limit in insuring
Government National Mortgage Association (GNMA) ARMS last April,
there has been virtually no GNMA ARMS origination over the last five
months. Since the GNMA ARMS market is a large, active and liquid
market, its re-emergence in October, during the start of the new US
fiscal year, should provide renewed investor interest and increased
activity in the overall ARMS market. Finally, despite lower interest
rates, seasonal factors should begin to influence ARMS prepayments,
as homeowner mobility typically slows in the fall and winter months.
As always, we will continue to strive to provide the highest yields
while limiting any net asset value volatility.
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 semi-
annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
October 7, 1998
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 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.
* 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 "Recent Performance
Results" and "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 8/31/98
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +5.07% +0.96% +27.93% 5.19%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +4.16 +0.65 +34.48 4.63
ML Adjustable Rate Securities Fund, Inc. Class C Shares +4.12 +0.75 +23.61 4.59
ML Adjustable Rate Securities Fund, Inc. Class D Shares +4.70 +0.79 +39.45 4.95
<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 & Class C Shares, 10/21/94 and
Class B & Class D Shares, 8/2/91.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 +5.62% +1.39%
Inception (10/21/94) through 6/30/98 +6.73 +5.56
<FN>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 +4.70% +0.72%
Five Years Ended 6/30/98 +4.52 +4.52
Inception (8/2/91) through 6/30/98 +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 6/30/98 +4.66% +3.66%
Inception (10/21/94) through 6/30/98 +5.78 +5.78
<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 6/30/98 +5.24% +1.03%
Five Years Ended 6/30/98 +5.07 +4.21
Inception (8/2/91) through 6/30/98 +4.85 +4.23
<FN>
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 1998
</TABLE>
<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 $ 2,755,503 Federal National Mortgage
Mortgage-Backed Deposit Indexed Association, #307622, 7.394%
Obligations** Obligations due 4/01/2023 $ 2,833,061 $ 2,841,171 2.69%
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,597,719 #645073, 7.715% due 5/01/2015 1,624,681 1,665,478 1.58
1,124,093 #607129, 7.408% due 1/01/2016 1,158,865 1,155,354 1.09
4,999,288 #840032, 7.297% due 1/01/2019 5,191,555 5,164,114 4.89
2,628,688 #606108, 7.598% due 9/01/2019 2,679,903 2,728,079 2.59
1,975,517 #775194, 7.102% due 3/01/2020 1,980,746 2,019,354 1.91
63,955 #785173, 7.365% due 8/01/2020 65,434 65,414 0.06
1,967,715 #845139, 7.782% due 3/01/2022 1,996,932 2,035,365 1.93
4,369,039 #845535, 7.681% due 10/01/2023 4,463,775 4,552,892 4.31
5,712,580 #755170, 7.363% due 8/01/2031 5,905,379 5,913,434 5.60
Federal National Mortgage
Association:
8,381,602 #70169, 7.242% due 12/01/2018 8,714,595 8,596,381 8.14
3,258,645 #142069, 7.12% due 12/01/2021 3,325,855 3,378,303 3.20
2,256,459 #139312, 7.608% due 12/01/2021 2,347,272 2,338,152 2.22
1,091,025 #181278, 7.163% due 9/01/2022 1,118,000 1,119,664 1.06
2,770,762 #200009, 7.565% due 2/01/2023 2,780,700 2,856,489 2.71
3,206,949 #291252, 7.82% due 8/01/2024 3,247,322 3,297,642 3.12
578,473 #324905, 7.605% due 9/01/2025 584,261 599,506 0.57
4,347,739 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a), 92-35-A1, 8.05%
due 11/25/2022 4,456,433 4,439,655 4.21
Cost of Funds 2,379,604 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a), 91-6-A1,
Obligations 7.82% due 9/25/2021 2,420,318 2,369,937 2.25
London Interbank 3,047,557 Federal National Mortgage
Offered Rate Indexed Association, #305729, 7.884%
Obligations due 2/01/2025 3,136,812 3,122,802 2.96
15,005,867 Resolution Trust Corporation,
REMIC (a), 92-C1-B,
7.688% due 8/25/2023 14,452,791 15,005,867 14.22
6,287,953 Resolution Trust Corporation,
REMIC (a), 92-C8-A2,
7.038% due 12/25/2023 6,314,503 6,303,673 5.97
Total Investments in
Adjustable Rate
Mortgage-Backed Obligations 80,799,193 81,568,726 77.28
Derivative 35,975,764 DLJ Mortgage Acceptance Corp.,
Mortgage-Backed REMIC (a), 92-6-A1, 0.65% due
Obligations**-- 7/25/2022 579,955 164,589 0.16
Interest Only (b) 51,366 Federal Home Loan Mortgage
Corporation, REMIC (a)(c),
92-1363-C, 333% due 8/15/2022 1,003,540 399,369 0.38
Sears Mortgage Securities
Corp., REMIC (a):
2,495 91-K-A4, 5,640% due 9/25/2021 384,290 226,948 0.21
19,409,295 92-12-A3, 0.49% due 7/25/2022 243,587 194,093 0.18
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 2,211,372 984,999 0.93
Fixed Rate 1,565,142 Federal National Mortgage
Mortgage-Backed Association, #201892, 8.50%
Obligations** due 9/01/2011 1,636,869 1,604,067 1.52
Total Investments in Fixed Rate
Mortgage-Backed Obligations 1,636,869 1,604,067 1.52
Total Investments in
Mortgage-Backed Obligations 84,647,434 84,157,792 79.73
US Government 8,000,000 Federal Home Loan Mortgage
Agency Obligations Corporation, 6.54% due 5/19/2000 8,107,935 8,159,424 7.73
Total Investments in
US Government Agency Obligations 8,107,935 8,159,424 7.73
US Government 5,000,000 United States Treasury Notes,
Obligations 5.50% due 2/29/2000 4,995,312 5,033,600 4.77
Total Investments in
US Government Obligations 4,995,312 5,033,600 4.77
Short-Term Repurchase 7,078,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 8/31/1998 to
yield 5.85% to 9/01/1998 7,078,000 7,078,000 6.71
Total Short-Term Securities 7,078,000 7,078,000 6.71
Total Investments $104,828,681 104,428,816 98.94
============
Other Assets Less Liabilities 1,121,529 1.06
------------ -------
Net Assets $105,550,345 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $1,168,981
and 122,211 shares outstanding $ 9.57
============
Class B--Based on net assets of $80,592,488
and 8,453,083 shares outstanding $ 9.53
============
Class C--Based on net assets of $4,560,551
and 478,254 shares outstanding $ 9.54
============
Class D--Based on net assets of $19,228,325
and 2,017,694 shares outstanding $ 9.53
============
<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 stated 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>
