MERRILL LYNCH TEXAS
MUNICIPAL BOND FUND
Quarterly Report October 31, 1994
TO OUR SHAREHOLDERS
Concerns of increasing inflationary pressures continued to
prompt volatility in the US stock and bond markets during
the October quarter. In addition, the weakness of the US
dollar in foreign exchange markets prolonged stock and bond
market declines. Early in the period, the possibility of
continued monetary policy tightening by the Federal Reserve
Board was predominant in the minds of investors. However, a
lower-than-expected rate of growth reported for the US
economy during the second calendar quarter allayed
inflationary concerns to some degree, despite the fifth
increase this year in short-term interest rates made by the
central bank in mid-August.
Inflationary expectations surfaced again with the
announcement of significant upward revisions in industrial
production and capacity utilization for the May--July
period. When the central bank did not raise short-term
interest rates at the late September Federal Open Market
Committee meeting, financial markets rallied on the
expectation that the US economy was not overheating and
therefore significant further monetary policy tightening
would not be necessary. Also encouraging were reports that
consumer spending is increasing at a lower rate than has
been the case in recent economic recoveries. Nevertheless,
shortly after the conclusion of the October quarter,
investor sentiment had again deteriorated. The report of
better-than-expected growth in the gross domestic product
for the three months ended September 30, combined with
evidence of a still-robust manufacturing sector and renewed
US dollar weakness, all rekindled concerns that short-term
interest rates would soon resume their upward trend.
<PAGE>
In the weeks ahead, investors will continue to assess
economic data and inflationary trends in order to gauge
whether further increases in short-term interest rates are
imminent. Continued indications of moderate and sustainable
levels of economic growth would be positive for the US
capital markets.
The Municipal Market
The long-term tax-exempt market continued to erode
throughout the three months ended October 31, 1994. As
measured by the Bond Buyer Revenue Bond Index, yields on
A-rated municipal revenue bonds maturing in 30 years rose
by almost 50 basis points (0.50%) to 6.95% during the
October 31, 1994 quarter. This represents the highest level
in tax-exempt bond yields in over two years. US Treasury
bonds suffered even greater declines during the quarter as
Treasury bond yields rose approximately 60 basis points to
end the quarter at 8.00%.
The tax-exempt bond market reacted negatively throughout
the October quarter to indications that, despite a series
of interest rate increases by the Federal Reserve Board,
the strength of the domestic economy seen in recent
quarters has not yet been significantly reduced. While
inflationary pressures have remained well contained,
additional Federal Reserve Board actions have been expected
both to ensure that domestic economic growth is eventually
confined to current levels and to assure nervous financial
markets of its anti-inflationary intentions.
Fortunately, while the demand for tax-exempt bonds has
declined somewhat in recent months, new bond issuance has
remained greatly reduced. During the quarter ended October
31, 1994, only $32 billion in long-term tax-exempt
securities were issued, a decline of over 50% versus the
October 31, 1993 quarter. Similarly, for the six months
ended October 31, 1994, only $75 billion in municipal
securities were underwritten, a decline of over 50% versus
the comparable period a year earlier. This reduction in
issuance in recent quarters has allowed the municipal bond
market to react to both the decline in investor demand and
the rise in fixed-income yields in a more orderly fashion
than in similar situations in the past, particularly during
1987.
<PAGE>
Long-term tax-exempt revenue bonds currently yield
approximately 7%, or almost 11.5% on an after-tax
equivalent basis, to an investor in the 39.6% Federal
income tax bracket. As inflation has only marginally
increased in the past year, real tax-exempt interest rates
have risen dramatically. The Federal Reserve Board appears
committed to maintaining inflation at or below its current
levels. Indeed, most forecasts expect inflation to remain
in its present range of 3%--4% throughout 1995 and,
potentially, for the remainder of the 1990s. Real after-tax
equivalent interest rates exceeding 7% represent
historically attractive municipal investments for long-term
investors.
Federal Reserve Board actions taken thus far have yet to
fully impact US domestic growth and expected additional
actions should promote only a modest economic expansion
within a benign inflationary context beginning sometime
early in 1995. Within such an environment, it is unlikely
that tax-exempt interest rates will remain at their current
attractive levels. Tax-exempt bond issuance is unlikely to
return to the historic high levels seen in 1992 and 1993,
while investor demand should return as markets stabilize.
As we have discussed in earlier reports, the total number
of tax-exempt bonds outstanding is scheduled to decline
dramatically in 1994 and 1995 as a result of both regular
bond maturities and early redemptions. Investors seeking
tax-advantaged issues are likely to find it very difficult
to obtain currently available tax-exempt yields as the
current supply/demand balance is unlikely to be maintained
in the coming quarters.
Portfolio Strategy
Municipal bond prices continued to decline in the quarter
ended October 31, 1994, with the yield on the Bond Buyer
Revenue Bond Index rising from 6.47% on July 29, 1994 to
6.95% on October 31,1994. During the October quarter,
Texas' new-issue supply declined 41% from the same period
last year, supporting the primary market.
Our outlook for the municipal market is more cautious for
the end of 1994 and into the first quarter of 1995. Though
real long-term interest rates look very attractive from a
historical standpoint, the strength of the economy warrants
caution before aggressively buying in this environment.
Moreover, bond market investors are not convinced that the
Federal Reserve Board has moved aggressively enough to
ensure low inflationary growth.
Our portfolio strategy has been to maintain a healthy cash
reserve position, at times more than 10% of net assets, and
to move away from more interest rate-sensitive discount
coupons into higher coupon housing bonds. Additionally, as
yields have risen substantially, we have looked to improve
credit quality and sell lower-rated healthcare issues,
industrial development bonds and pollution control revenue
bonds. In the weeks ahead, we expect higher-quality issues
to outperform lower-rated issues while offering an
attractive yield to shareholders.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
November 21, 1994
PORTFOLIO COMPOSITION
For the Quarter Ended October 31, 1994
Distribution by Market Sector*
Other Revenue Bonds 80.3%
General Obligation & Tax Revenue Bonds 14.1
Utility Revenue Bonds 5.6
------
Total 100.0%
======
Net assets as of October 31, 1994 were $86,531,710.
[FN]
*Based on total market value of the portfolio as of October 31, 1994.
++Temporary investments in short-term municipal securities.
Quality Ratings*
GRAPHIC MATERIAL APPEARS HERE.
SEE APPENDIX GRAPHIC AND IMAGE MATERIAL ITEM 1.
<PAGE>
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been 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 4.00%, and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4.00% if redeemed during the first year, decreasing 1.00%
each year thereafter to 0.00% after the fourth year. In addition,
Class B Shares are subject to a distribution fee of 0.25% and an
account maintenance fee of 0.25%. These shares automatically convert
to Class D Shares after 10 years.
* Class C Shares are subject to a distribution fee of 0.35% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1.00% contingent deferred sales charge if redeemed
within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4.00% and
an account maintenance fee of 0.10% (but no distribution fee).
The performance data for the Fund's Class A and Class B Shares are
presented in the "Average Annual Total Return" tables below. Data
for all of the Fund's shares, including Class C and Class D Shares,
are presented in the "Recent Performance Results" table. The "Recent
Performance Results" table below shows investment results before the
deduction of any sales charges for Class A and Class B Shares for
the 12-month and 3-month periods ended October 31, 1994 and for
Class C and Class D Shares for the period since inception through
October 31, 1994. All data in this table assume imposition of the
actual total expenses incurred by each class of shares during the
relevant period.
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.
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
10/31/94 7/31/94++ 10/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.03 $10.51 $11.43 -11.51%(1) -4.57%
Class B Shares* 10.03 10.51 11.43 -11.51(1) -4.57
Class C Shares* 10.03 10.16 -- -- -1.28
Class D Shares* 10.03 10.16 -- -- -1.28
Class A Shares--Total Return* -5.05(2) -3.19(3)
Class B Shares--Total Return* -5.53(4) -3.31(5)
Class C Shares--Total Return* -- -1.17(6)
Class D Shares--Total Return* -- -1.16(7)
Class A Shares--Standardized 30-day Yield 5.42%
Class B Shares--Standardized 30-day Yield 5.13%
<FN>
*Investment results shown do not reflect sales charges; results shown would be lower
if a sales charge was included.
++Investment results for Class C and Class D Shares are since inception (10/21/94).
(1)Percent change includes reinvestment of $0.094 per share capital gains distributions.
(2)Percent change includes reinvestment of $0.760 per share ordinary income dividends and
$0.094 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.147 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.706 per share ordinary income dividends and
$0.094 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.134 per share ordinary income dividends.
(6)Percent change includes reinvestment of $0.001 per share ordinary income dividends.
(7)Percent change includes reinvestment of $0.002 per share ordinary income dividends.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/94 -2.91% -6.79%
Inception (8/30/91)
through 9/30/94 +7.99 +6.58
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/94 -3.32% -6.90%
Inception (8/30/91)
through 9/30/94 +7.45 +7.17
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
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.
Officers and Trustees
Arthur Zeikel, President and Trustee
Kenneth S. Axelson, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Jerry Weiss, Secretary
<PAGE>
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
Merrill Lynch Texas Municipal Bond Fund
Merrill Lynch Multi-State Municipal Series Trust
Box 9011
Princeton, New Jersey 08543-9011
<PAGE>
APPENDIX GRAPHIC AND IMAGE MATERIAL.
ITEM 1:
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 31%
AA/Aa 28%
A/A 14%
BBB/Baa 18%
Other++ 9%
[FN]
*Based on total market value of the portfolio as of October 31, 1994.
++Temporary investments in short-term municipal securities.
