MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND
Quarterly Report November 30, 1994
TO OUR SHAREHOLDERS
The Municipal Market
The long-term tax-exempt market continued to erode throughout the
three months ended November 30, 1994. As measured by the Bond Buyer
Revenue Bond Index, yields on A-rated municipal revenue bonds
maturing in 30 years rose by over 85 basis points (0.85%) to 7.32%
during the period ended November 30, 1994. This represents the
highest level of tax-exempt bond yields in over two years. US
Treasury bonds also suffered significant declines during the quarter
as Treasury bond yields rose approximately 55 basis points to end
the quarter at 8.00%.
The tax-exempt bond market reacted negatively throughout the 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. Within this context, institutional investors have
largely withdrawn from the municipal market to await a more stable
environment. At the same time, retail investors have been redeeming
mutual fund shares, largely in anticipation of continued price
declines. Investor withdrawals were particularly heavy in October
and early November, with tax-exempt mutual fund outflows exceeding
$3 billion during the last quarter.
<PAGE>
Fortunately, while the demand for tax-exempt bonds has declined
somewhat in recent months, new bond issuance has remained greatly
reduced. During the three-months ended November 30, 1994, only $32
billion in long-term tax-exempt securities were issued, a decline of
over 50% compared to the November 30, 1993 quarter. Similarly, for
the six months ended November 30, 1994, only $75 billion in
municipal securities were underwritten, a decline of over 50%
compared to 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.
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
During the November quarter, the California insured municipal bond
marketplace experienced unusually high price volatility.
Uncomfortably high dealer inventories combined with mutual fund
redemptions contributed to a level of illiquidity that at times
exaggerated negative price movements. The historically low level of
new issuance combined with the anticipation of coupon reinvestment
in the near future should have led to a technically sound municipal
market. This possible scenario had led us to maintain relatively low
cash reserves in the Fund. We attempted to address the current
market volatility through the process of "up couponing," whereby we
sold low current return items to decrease price sensitivity to a
negative market swing. We reinvested proceeds in higher-couponed
securities to increase current return and temper the portfolio's
reaction to an environment of rising interest rates.
<PAGE>
Periods of market uncertainty create opportunity, however.
Volatility widens yield spreads between different classes of
securities. We purchased small percentages of securities subject to
the alternative minimum tax. If the yield spreads between these
items and other insured California bonds continue to widen, we could
increase the percentage of Fund assets in these sectors to boost
current yield. Currently, 87% of the Fund's total assets are rated
AAA, with credit enhancement, by one of the major rating services.
Investment Update
On December 6, 1994, Orange County, California filed for bankruptcy
under Chapter 9 of the Federal bankruptcy code in response to losses
stemming from a portfolio strategy involving leveraging its assets
and the investment in longer maturity and less-liquid derivative
securities. As of December 21, 1994, the Fund owned bonds issued by
municipalities or other issuers within Orange County; however, each
of these bonds has municipal bond insurance issued by a Aaa/AAA
rated insurance company guaranteeing timely payment of interest and
principal. The percentage of the Fund's total assets falling into
the category of enhanced (insured) Orange County-related obligations
is approximately 3.1%. The Fund's municipal research group of the
Investment Adviser has scrutinized each holding in the portfolio and
analyzed possible negative repercussions from credit-related fallout
from Orange County. We want to stress that we do not expect Merrill
Lynch California Insured Municipal Bond Fund to be weakened in terms
of the credit quality of its holdings despite Orange County's
financial crisis. Although the Fund is not insulated from general
market movements, we are extremely confident that our emphasis on
the high credit quality of the Fund's portfolio mix has put us in a
strong position to weather the current storm. Naturally, we will be
closely monitoring the situation for any new developments that could
impact the California municipal bond marketplace.
In Conclusion
We appreciate your investment in Merrill Lynch California Insured
Municipal Bond Fund, and we look forward to assisting you with your
financial needs in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
<PAGE>
January 3, 1995
PORTFOLIO COMPOSITION
For the Quarter Ended November 30, 1994
Distribution by Market Sector*
General Obligation & Tax Revenue Bonds 47.7%
Other Revenue Bonds 40.3
Utility Revenue Bonds 12.0
------
Total 100.0%
======
Net assets as of November 30, 1994 were $82,194,054.
[FN]
*Based on total market value of the portfolio as of November 30, 1994.
++Temporary investments in short-term municipal securities.
++++Not Rated.
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX,
GRAPHIC AND IMAGE MATERIAL: ITEM 1.
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% 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% 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 0.25% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 10 years.
<PAGE>
* 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% 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 0.10% (but no distribution fee).
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 November
30, 1994 and for Class C and Class D Shares for the period since
inception through November 30, 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.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
11/30/94 8/31/94++ 11/30/93 % Change % Change++
<S> <C> <C> <C> <C> <C>
Class A Shares* $8.76 $9.54 $10.06 -12.92% -8.18%
Class B Shares* 8.76 9.54 10.06 -12.92 -8.18
Class C Shares* 8.75 9.19 -- -- -4.79
Class D Shares* 8.76 9.19 -- -- -4.68
Class A Shares--Total Return* - 7.74(1) -6.83(2)
Class B Shares--Total Return* - 8.21(3) -6.95(4)
Class C Shares--Total Return* -- -4.27(5)
Class D Shares--Total Return* -- -4.10(6)
Class A Shares--Standardized 30-day Yield 6.30%
Class B Shares--Standardized 30-day Yield 6.28%
Class C Shares--Standardized 30-day Yield 6.83%
Class D Shares--Standardized 30-day Yield 6.45%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
would be lower if a sales charge was included.
++Investment results shown for Class C and Class D Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.554 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.130 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.505 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.119 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.037 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.042 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 -4.40% -8.22%
Inception (2/26/93)
through 9/30/94 +0.85 -1.70
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/94 -4.79% -8.39%
Inception (2/26/93)
through 9/30/94 +0.41 -1.34
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
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
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch California 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 83%
AA/Aa 2%
A/A 2%
BBB/Baa 6%
Other++ 5%
NR++++ 2%
[FN]
*Based on total market value of the portfolio as of November 30, 1994.
++Temporary investments in short-term municipal securities.
++++Not Rated.
