MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Quarterly Report
August 31, 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
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 1999
DEAR SHAREHOLDER
US economic growth paused briefly in the second quarter of 1999 as
gross domestic product (GDP) growth rose just 1.8% compared to 4.3%
in the first quarter. Much of the second quarter decline was
attributable to reduced business inventories and decreased
Government spending, which subtracted 1.5% from GDP growth. Consumer
spending, although down slightly from the first quarter, still rose
a healthy 4.6% in the second quarter and remains the most important
catalyst in the ongoing eight-year economic expansion. We expect GDP
growth to rebound in the third quarter because of continued strong
consumer demand and a reversal of the business inventory depletion
in the second quarter.
US interest rates rose during the quarter ended August 31, 1999, as
the US Federal Reserve Board tightened monetary policy. Citing
"continuing strains within the labor markets" coupled with
"uncertainty over future productivity gains," Federal Reserve Board
Chairman Alan Greenspan raised interest rates on two separate
occasions from 4.75% to 5.25% during the period. While current broad
market inflationary indicators show overall inflation to be near
33-year lows, the Federal Reserve Board raised interest rates in a pre-
emptive measure to counter potential future inflationary pressures
resulting from imbalances within the US labor market. The core
consumer price index, a widely watched inflation index that excludes
the volatile food and energy sectors, was up just 1.6% in 1999 on an
annualized basis through August. This is the slowest rate of
inflation since 1966.
Nonetheless, we see some sectors of the US economy that are stressed
and could experience inflationary pressures. First, with the US
unemployment rate near a 30-year low of 4.2%, labor markets remain
tight. Although average hourly earnings in 1999 are up a modest 3.7%
through August, there are pockets within the economy where labor
shortages exist and wage gains are well exceeding the average
earnings rate. Second, crude oil prices have risen more than 60%
year-to-date through August 1999. While oil prices are typically
volatile, we would expect these higher prices to ultimately affect
the energy-dependent sectors of the US economy, such as
transportation, should these price advances hold. Finally, despite
rising interest rates in 1999, the US housing market remains strong.
New home sales reached their second-highest level ever recorded in
July 1999. More important, new home construction appears to be
constrained by capacity shortages rather than slowing demand, which
is being reflected in rising home prices. According to the national
home price index, home prices rose 5.4% year-to-date through June
1999, compared with a yearly average price gain of just 3.0% in the
1990s.
We expect the Federal Reserve Board to remain vigilant in its watch
over inflation, and we believe it could ultimately raise interest
rates again this year. However, we do not believe a protracted
series of interest rate hikes is likely at this time. In addition,
we believe the United States is well along in the remediation of
potential computer-related Year 2000 problems. As such, we do not
anticipate major Year 2000 disruptions in the United States at year-
end. However, we believe there are still some regions of the world
where Year 2000-related problems could possibly develop. Should
these Year 2000 difficulties become magnified and fears of a global
recession spread, it may be possible for US interest rates to move
lower in a "flight to quality" toward the US financial markets. In
any event, we expect the Federal Reserve Board to provide sufficient
liquidity to the US financial system at year-end should credit
strains develop from Year 2000-related events.
Portfolio Strategy
During the quarter ended August 31, 1999, the yield on the one-year
US Treasury bill rose 0.31% to 5.28%, while the 10-year US Treasury
note rose 0.36% to 5.98%. More important, interest rate swings were
volatile during the period as investors gauged the potential of
future interest rate hikes by the Federal Reserve Board against
temperate economic reports. During periods of heightened interest
rate volatility, adjustable rate mortgage securities (ARMS)
typically lag in performance, since it becomes more difficult to
value the prepayment optionality of the underlying mortgages.
However, ARMS performed well during the period for the following two
reasons, in spite of a tumultuous environment. First, prepayments of
ARMS continue to decline as higher interest rates have reduced the
incentive of homeowners to refinance out of adjustable rate
mortgages into fixed-rate mortgages. Consequently, slower
prepayments have improved the yield of ARMS. Second, rising interest
rates in 1999 have caused homeowners to favor adjustable rate
mortgages rather than fixed-rate mortgages. As a result, the
origination of ARMS has increased. Issuance of Government National
Mortgage Association (GNMA) ARMS in the third quarter of 1999
exceeded $3.3 billion, up from just $0.5 billion in the first
quarter. Since the GNMA ARMS sector acts as a benchmark for the
overall ARMS market, the increase in tradable supply has improved
liquidity, causing investor demand for ARMS to increase as well.
During the period, we implemented several strategies to enhance Fund
performance. First, we slightly reduced our ARMS holdings to 74% of
assets, while increasing our cash position. This not only allowed us
to maintain the Fund's duration target of one year, but it also
provided us the flexibility to pursue attractive investment
opportunities should Federal Reserve Board tightening fears persist
or Year 2000 liquidity concerns develop. We also added seven-year
balloon mortgages to our holdings. In our opinion, these discount-
priced securities not only offer extremely attractive yields as a
result of wider yield spreads, but potential price appreciation if
prepayment speeds increase.
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
September 29, 1999
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 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
As of August 31, 1999 Total Return Total Return Total Return As of 8/31/99
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +4.96% +1.32% +34.28% 5.86%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +4.15 +1.02 +40.07 5.34
ML Adjustable Rate Securities Fund, Inc. Class C Shares +4.11 +1.11 +28.69 5.29
ML Adjustable Rate Securities Fund, Inc. Class D Shares +4.70 +1.15 +46.00 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 since inception dates are from 10/21/94 for Class A & Class C
Shares and from 8/2/91 for Class B & Class D Shares.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/99 +4.52% +0.34%
Inception (10/21/94) through 6/30/99 +6.26 +5.33
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/99 +3.72% -0.24%
Five Years Ended 6/30/99 +5.21 +5.21
Inception (8/02/91) through 6/30/99 +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 6/30/99 +3.68% +2.69%
Inception (10/21/94) through 6/30/99 +5.33 +5.33
[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 6/30/99 +4.26% +0.09%
Five Years Ended 6/30/99 +5.73 +4.87
Inception (8/02/91) through 6/30/99 +4.77 +4.23
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., August 31, 1999
<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 $ 1,508,654 Federal National Mortgage Association,
Rate* Mortgage Deposit Indexed #307622, 6.778% due 4/01/2023 $ 1,550,210 $ 1,567,582 1.9%
- -Backed Obligations
Obligations**
Constant Maturity Federal Home Loan Mortgage Corporation:
Treasury Indexed 1,318,256 #645073, 7.714% due 5/01/2015 1,340,501 1,350,797 1.6
Obligations 894,304 #607129, 6.976% due 1/01/2016 921,078 904,365 1.1
4,221,701 #840032, 6.439% due 1/01/2019 4,379,587 4,327,243 5.2
1,833,942 #606108, 6.863% due 9/01/2019 1,868,624 1,884,944 2.2
1,665,742 #755194, 6.415% due 3/01/2020 1,670,026 1,697,758 2.0
62,630 #785173, 6.515% due 8/01/2020 64,078 63,295 0.1
951,842 #845139, 6.935% due 3/01/2022 965,619 980,692 1.2
2,894,210 #845535, 7.044% due 10/01/2023 2,955,767 2,970,886 3.5
4,020,100 #755170, 6.656% due 8/01/2031 4,155,778 4,104,281 4.9
Federal National Mortgage Association:
6,418,647 #70169, 6.471% due 12/01/2018 6,666,678 6,567,020 7.8
2,125,891 #142069, 6.494% due 12/01/2021 2,169,738 2,173,724 2.6
2,060,025 #139312, 6.845% due 12/01/2021 2,126,905 2,117,637 2.5
733,451 #181278, 6.57% due 9/01/2022 751,214 744,242 0.9
2,111,843 #200009, 6.556% due 2/01/2023 2,119,226 2,195,007 2.6
1,856,534 #291252, 7.291% due 8/01/2024 1,879,488 1,895,112 2.3
461,547 #324905, 6.715% due 9/01/2025 466,077 475,575 0.6
Government National Mortgage
Association:
6,831,618 #8123, 6.375% due 1/20/2023 6,956,242 6,936,081 8.3
3,018,742 #8217, 6.375% due 6/20/2023 3,054,064 3,039,511 3.6
2,489,357 Prudential Home Mortgage Securities
Company, Inc., REMIC (a), 92-35-A1,
7.7859% due 11/25/2022 2,551,591 2,478,927 2.9
Cost of Funds 1,632,980 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a), 91-6-A1, 7.7686% due
Obligations 9/25/2021 1,660,920 1,631,178 2.0
London Interbank 1,399,460 Federal National Mortgage Association,
Offered Rate #305729, 7.232% due 2/01/2025 1,439,717 1,432,264 1.7
Indexed Resolution Trust Corporation,
Obligations REMIC (a):
8,478,500 92-C1-B, 7.1224% due 8/25/2023 8,439,438 8,477,991 10.1
2,274,002 92-C8-A2, 6.5375% due 12/25/2023 2,274,002 2,277,776 2.7
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 62,426,568 62,293,888 74.3
Derivative 22,576,341 DLJ Mortgage Acceptance Corp., REMIC
Mortgage-Backed (a), 92-6-A1, 0.6559% due 7/25/2022 335,280 310,953 0.4
Obligations**-- 31,691 Federal Home Loan Mortgage Corporation,
Interest Only (b) REMIC (a)(c), 92-1363-C, 390% due
8/15/2022 864,750 232,533 0.3
Sears Mortgage Securities Corp.,
REMIC (a):
1,477 91-K-A4, 6,063% due 9/25/2021 265,098 132,139 0.2
11,318,291 92-12-A3, 0.4938 due 7/25/2022 167,231 113,183 0.1
Total Investments in Derivative
Mortgage-Backed Obligations 1,632,359 788,808 1.0
Fixed Rate Federal National Mortgage Association:
Mortgage-Backed 5,000,000 6.50% (d), TBA (e) 4,943,750 4,895,300 5.8
Obligations** 1,061,249 #201892, 8.50% due 9/01/2011 1,107,656 1,084,172 1.3
Total Investments in Fixed Rate
Mortgage-Backed Obligations 6,051,406 5,979,472 7.1
Total Investments in
Mortgage-Backed Obligations 70,110,333 69,062,168 82.4
US Government 8,000,000 Federal National Mortgage Association,
Agency 5.625% due 3/15/2001 8,092,832 7,943,760 9.5
Obligations
Total Investments in US Government
Agency Obligations 8,092,832 7,943,760 9.5
Short-Term Repurchase 11,032,000 Morgan Stanley, Dean Witter,
Securities Agreements*** Discover & Co., purchased on
8/31/1999 to yield 5.35% to
9/01/1999 11,032,000 11,032,000 13.1
Total Short-Term Securities 11,032,000 11,032,000 13.1
Total Investments $ 89,235,165 88,037,928 105.0
============
Liabilities in Excess of Other
Assets (4,215,984) (5.0)
------------ ------
Net Assets $ 83,821,944 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $1,009,336 and
106,064 shares outstanding $ 9.52
============
Class B--Based on net assets of $67,409,620
and 7,107,411 shares outstanding $ 9.48
============
Class C--Based on net assets of $5,571,976 and
587,341 shares outstanding $ 9.49
============
Class D--Based on net assets of $9,831,012 and
1,036,919 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.
(d)Represents balloon mortgages that amortize on a 30 year schedule
and have 7 year maturities.
(e)Represents or includes a "to-be-announced" (TBA) transaction. The
Fund has committed to purchasing securities for which all specific
information is not available at this time.
*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.
</TABLE>
