MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
February 28, 1999
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
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Donald C. Burke, Vice President and 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
Gerald M. Richard, Treasurer of Merrill Lynch Adjustable Rate
Securities Fund, Inc. has recently retired. His colleagues at
Merrill Lynch Asset Management, L.P. join the Fund's Board of
Directors in wishing Mr. Richard well in his retirement.
Merrill Lynch Adjustable Rate Securities Fund, Inc.,
February 28, 1999
DEAR SHAREHOLDER
The US economy ended 1998 on an impressive note as gross domestic
product (GDP) growth surged 6.1% in the fourth quarter of 1998 and
4.3% for all of 1998, the strongest rate of growth in 14 years.
Consumer spending remains strong as low interest rates coupled with
strong equity market gains continue to fuel demand. Nonetheless,
global economic growth remains sluggish and turmoil persists, as
Brazil devalued its currency during the February quarter.
US economic growth rose sharply in the fourth quarter of 1998 as
numerous fundamental factors resulted in strong consumer demand.
Strong equity market returns further contributed to household
wealth, allowing consumers to spend a greater proportion of their
personal incomes. In addition, the US unemployment rate, at 4.3%,
remains near a 30-year low. Consequently, as consumers feel more
comfortable with job security and employment prospects, confidence
increases and consumers tend to spend more. More important, falling
interest rates have contributed to a booming housing sector, which
has fueled purchases of appliances and other household furnishings.
As a result, durable goods purchases rose sharply and added 1.6% to
GDP growth during the fourth quarter of 1998. In addition, lower
interest rates allowed homeowners to refinance their mortgages,
further enabling consumers to pay down debt or make new purchases.
While fourth quarter growth was strong, it appears that much of the
same economic euphoria is continuing into the first quarter of 1999.
The US housing market continues to exhibit remarkable growth.
Through January 1999, existing home sales were reported at a 5.1
million-unit rate, an all-time record, while new home sales were
reported at a 1.8 million-unit rate, a 12-year high. Consequently,
consumer confidence is back in record territory after dipping
slightly in the fourth quarter. The manufacturing sector is
beginning to show renewed vigor after a sluggish period. The
National Association of Purchasing Managers Index was 52.4 in
February, the first reading over 50 in nine months. (A reading above
50 implies that the manufacturing sector expanded during the month.)
A lack of corporate pricing power along with declines in oil and
import prices continued to keep inflationary pressures subdued.
Through February, both the consumer and producer price indexes were
up just 1.6% and 0.5%, respectively. However, with the strength of
the US economy, interest rates rose sharply as investors believed
there might be the possibility of a monetary policy tightening by
the Federal Reserve Board.
In his February Humphrey-Hawkins testimony, Federal Reserve Board
Chairman Alan Greenspan indicated that the Federal Reserve Board
"needs to evaluate whether the full extent of the easings undertaken
last fall remain appropriate." Although Chairman Greenspan's
statement raised speculation as to whether the Federal Reserve Board
will increase interest rates, we believe it will adopt a neutral
bias and refrain from raising interest rates in the near term for
several reasons. First, while credit market conditions (which
prompted the initial easings) have improved, they are still nowhere
near the pre-crisis environment of August. Second, the global
economic environment remains sluggish and could ultimately affect US
growth. Finally, inflation essentially remains non-existent in the
current environment. We believe this will allow the Federal Reserve
Board additional time to assess the balance of risks to the US
economy. However, should the US labor market begin to tighten
further or inflation unexpectedly pick up, we expect the Federal
Reserve Board to promptly tighten monetary policy.
Portfolio Strategy
US interest rates rose sharply toward the close of the February
quarter, as concerns of a possible monetary policy tightening by the
Federal Reserve Board arose in response to the unexpected and
resounding strength of the US economy. The yield on the one-year US
Treasury bill rose 0.35% to 4.85%, while the yield on the 30-year US
Treasury bond rose 0.51% to 5.58% during the quarter. More
important, the US Treasury yield curve steepened significantly as
the yield spread between the three-month US Treasury bill and the
ten-year US Treasury note widened to 0.62% from just 0.23% at the
start of the February quarter. Consequently, the adjustable rate
mortgage securities (ARMS) area was one of the few fixed-income
sectors that generated a positive total rate of return during the
quarter ended February 28, 1999. ARMS performed well for two primary
reasons. First, in response to the steepening of the US Treasury
yield curve and the rise in interest rates, the incentive for
homeowners to refinance their mortgages was reduced. As a result,
ARMS investors reduced their prepayment expectations, causing yield
spreads to narrow and prices to rise. Second, because of the wide
yield spreads and low dollar prices of ARMS, investor demand
increased. However, the availability of ARMS remains limited.
According to the Federal Home Loan Mortgage Corporation, less than
1% of the mortgages originated during the February quarter were
ARMS. As a result, supply and demand pressures helped push ARMS
prices higher.
During the February quarter, we increased our holdings of ARMS to
87% of net assets, up from 75% at the start of the three-month
period. As a result, we benefited from the narrowing of ARMS yield
spreads, and the Fund's net asset values rose during the February
quarter despite an increase in interest rates. We continue to be
predominately invested in seasoned ARMS (those originated more than
six years ago), since we believe this sector will benefit most from
a slowdown in ARMS prepayments. Although ARMS yield spreads have
narrowed and prices have risen, we still believe ARMS offer value.
Therefore, we intend to remain highly invested in ARMS. However,
should ARMS prices begin to exceed fair value, we intend to scale
back some of our holdings. It is our goal to seek to generate the
highest possible yields while limiting any net asset volatility.
In Conclusion
We thank you for your investment in Merrill Lynch Adjustable Rate
Securities Fund, Inc., and we look forward to reviewing our outlook
and strategy with you in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
March 26, 1999
Merrill Lynch Adjustable Rate Securities Fund, Inc.,
February 28, 1999
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 2/28/99
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +4.34% +1.59% +30.75% 5.15%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +3.53 +1.40 +37.06 4.59
ML Adjustable Rate Securities Fund, Inc. Class C Shares +3.49 +1.39 +25.82 4.55
ML Adjustable Rate Securities Fund, Inc. Class D Shares +4.07 +1.53 +42.34 4.91
<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 since inception periods are Class A & Class C Shares, from
10/21/94 to 2/28/99 and Class B & Class D Shares, from 8/2/91 to
2/28/99.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/98 +4.57% +0.39%
Inception (10/21/94) through 12/31/98 +6.41 +5.38
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/98 +3.76% -0.19%
Five Years Ended 12/31/98 +4.65 +4.65
Inception (8/2/91) through 12/31/98 +4.25 +4.25
[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 12/31/98 +3.61% +2.63%
Inception (10/21/94) through 12/31/98 +5.47 +5.47
[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 12/31/98 +4.31% +0.13%
Five Years Ended 12/31/98 +5.19 +4.34
Inception (8/2/91) through 12/31/98 +4.79 +4.22
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., February 28, 1999
<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 $ 2,026,378 Federal National Mortgage Association,
Mortgage-Backed Deposit Indexed #307622, 7.49% due 4/01/2023 $ 2,083,025 $ 2,064,697 2.21%
Obligations** Obligations
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,483,452 #645073, 7.717% due 5/01/2015 1,508,485 1,548,591 1.66
1,020,935 #607129, 7.03% due 1/01/2016 1,052,014 1,033,319 1.11
4,537,302 #840032, 6.784% due 1/01/2019 4,709,485 4,635,852 4.96
2,098,061 #606108, 7.251% due 9/01/2019 2,138,375 2,164,947 2.32
1,871,420 #755194, 6.705% due 3/01/2020 1,876,304 1,893,203 2.03
63,331 #785173, 6.962% due 8/01/2020 64,796 63,826 0.07
1,175,640 #845139, 7.199% due 3/01/2022 1,192,862 1,186,116 1.27
3,496,052 #845535, 7.31% due 10/01/2023 3,571,147 3,612,011 3.87
4,680,481 #755170, 6.821% due 8/01/2031 4,838,447 4,752,139 5.09
Federal National Mortgage
Association:
7,227,726 #70169, 6.753% due 12/01/2018 7,511,062 7,345,177 7.86
2,500,633 #142069, 6.271% due 12/01/2021 2,552,209 2,536,967 2.72
2,877,692 #139312, 6.926% due 12/01/2021 2,972,056 2,960,615 3.17
842,011 #181278, 7.01% due 9/01/2022 862,643 852,010 0.91
2,435,434 #200009, 6.569% due 2/01/2023 2,444,026 2,508,108 2.69
2,386,306 #291252, 7.604% due 8/01/2024 2,416,106 2,433,650 2.61
575,456 #324905, 7.37% due 9/01/2025 581,171 592,722 0.63
Government National Mortgage
Association:
7,861,140 #8123, 6.875% due 1/20/2023 8,005,899 7,998,710 8.56
3,574,394 #8217, 6.875% due 6/20/2023 3,616,610 3,636,945 3.89
3,256,236 Prudential Home Mortgage Securities
Company, Inc., REMIC (a), 92-35-A1,
7.843% due 11/25/2022 3,337,642 3,261,218 3.49
Cost of Funds 1,959,741 DLJ Mortgage Acceptance Corp., REMIC
Indexed Obligations (a), 91-6-A1, 7.801% due 9/25/2021 1,993,271 1,959,741 2.10
London Interbank 2,472,016 Federal National Mortgage Association,
Offered Rate #305729, 7.419% due 2/01/2025 2,543,730 2,531,493 2.71
Indexed Resolution Trust Corporation, REMIC (a):
Obligations 15,005,923 92-C1-B, 7.625% due 8/25/2023 14,452,848 15,005,923 16.06
4,253,655 92-C8-A2, 6.288% due 12/25/2023 4,261,918 4,216,435 4.51
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 80,586,131 80,794,415 86.50
Derivative 30,503,098 DLJ Mortgage Acceptance Corp., REMIC
Mortgage-Backed (a), 92-6-A1, 0.651% due 7/25/2022 488,543 281,748 0.30
Obligations**-- 41,075 Federal Home Loan Mortgage Corporation,
Interest Only (b) REMIC (a)(c), 92-1363-C, 447% due
8/15/2022 923,736 283,219 0.30
Sears Mortgage Securities Corp.,
REMIC (a):
1,832 91-K-A4, 5,819% due 9/25/2021 324,155 164,549 0.18
15,782,935 92-12-A3, 0.502% due 7/25/2022 202,924 157,829 0.17
Total Investments in Derivative
Mortgage-Backed Obligations--Interest
Only 1,939,358 887,345 0.95
Fixed-Rate 1,307,656 Federal National Mortgage Association,
Mortgage-Backed #201892, 8.50% due 9/01/2011 1,366,238 1,355,111 1.45
Obligations**
Total Investments in Fixed-Rate
Mortgage-Backed Obligations 1,366,238 1,355,111 1.45
Total Investments in Mortgage-Backed
Obligations 83,891,727 83,036,871 88.90
US Government 8,000,000 Federal National Mortgage Association,
Agency Obligations 5.625% due 3/15/2001 8,121,557 8,037,520 8.60
Total Investments in
US Government Agency Obligations 8,121,557 8,037,520 8.60
Short-Term Repurchase 1,782,000 Morgan Stanley, Dean Witter & Company,
Securities Agreements*** purchased on 2/26/1999 to yield 4.73%
to 3/01/1999 1,782,000 1,782,000 1.91
Total Short-Term Securities 1,782,000 1,782,000 1.91
Total Investments $ 93,795,284 92,856,391 99.41
============
Other Assets Less Liabilities 554,341 0.59
------------ -------
Net Assets $ 93,410,732 100.00%
============ =======
Net Asset Value: Class A--Based on net assets of $961,697 and
101,022 shares outstanding $ 9.52
============
Class B--Based on net assets of $75,214,349 and
7,927,562 shares outstanding $ 9.49
============
Class C--Based on net assets of $5,455,774 and
574,909 shares outstanding $ 9.49
============
Class D--Based on net assets of $11,778,912 and
1,241,901 shares outstanding $ 9.48
============
<FN>
(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.
*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.
</TABLE>
