MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND
Quarterly Report May 31, 1995
TO OUR SHAREHOLDERS
During the three months ended May 31, 1995, the municipal bond
market continued the improvement that began in late 1994. Signs of a
weakening domestic economy and ongoing moderate inflationary
pressures continue to foster an environment of declining interest
rates. As measured by the Bond Buyer Revenue Bond Index, yields of
A-rated, uninsured municipal revenue bonds declined over 30 basis
points (0.30%) during the May quarter to 6.02%. Tax-exempt bond
yields fell over 125 basis points from the highs reached in November
1994 and are now lower than they were a year ago. The 30-year US
Treasury bond yield declined approximately 75 basis points to 6.65%
during the three months ended May 31, 1995.
The recent underperformance of the tax-exempt bond market can be
viewed as the result of a combination of special factors, all of
which are likely to have only a limited impact on the market in the
long run. It is important to note that over the last six months
declines in both taxable and tax-exempt bond yields were essentially
identical. Long-term US Treasury bond yields fell 135 basis points
since the end of November 1994. Similarly, municipal bond yields
declined 130 basis points over the same period. However, the tax-
exempt bond market saw much of its improvement in late 1994 and
early 1995. In January and February the tax-exempt bond market
easily outperformed its taxable counterpart. Recent underperformance
by municipal bonds is mostly the result of the taxable bond market
"catching up" to the municipal bond market's earlier gains.
Additionally, in recent months various proposed tax law changes
(such as the flat, value added or national sales taxes) have raised
concerns regarding the ongoing tax-advantaged status of municipal
bonds and reduced investor demand. Such concerns are likely to
quickly recede as investors realize that any changes, even if they
do occur, are unlikely to be enacted before late 1996 at the
earliest. Long-term investors will recall 1986 when similar tax
proposals were made and municipal bond yields initially rose, in
some instances, to over 100% of taxable yields. Tax-exempt bond
yields quickly declined as investor fears proved to be unfounded.
Investor demand was also diminished in recent months by the "sticker
shock" effect that periodically affects the tax-exempt bond market.
Investors who had become accustomed to purchasing municipal
securities yielding in the 6.50%--7.00% range six months to seven
months ago have demonstrated understandable reluctance to purchase
similar securities at current levels. The ongoing strong technical
structure of the municipal market, however, suggests that such
hesitancy may prove costly.
Investors are expected to receive as much as $80 billion from
tax-exempt bond maturities, coupon payments, and the proceeds of
early bond redemptions during June and July. This amount is far
greater than the total new bond issuance seen in recent months.
During the May 31, 1995 quarter, less than $35 billion in tax-exempt
securities were issued. This represents a decline in issuance of
approximately 25% versus the May 31, 1994 quarter levels. With
estimates of 1995 annual new bond issuance at approximately $125
billion, the supply of available municipal securities is likely to
remain extremely limited regardless of the market level.
Tax-exempt bonds currently yield 85%--90% of comparable US Treasury
securities. Analysts usually consider municipal bonds yielding more
than 82% of US Treasury bonds to be historically attractive. For
example, with after-tax equivalent yields in excess of 9.50%,
municipal securities appear to represent considerable value.
Investors are likely to view the current situation as an opportunity
to purchase very attractively priced tax-exempt products. This
should cause municipal bond yields to quickly return to their more
historic relationship.
<PAGE>
Portfolio Strategy
The municipal bond market's recent performance led to a decline in
interest rates to a point where historical retail demand disappears.
Our strategy consisted of raising the overall average level of the
Fund's coupon structure and in the process tempering its reaction to
future price movements. As such, we raised cash equivalent reserve
levels to approximately 12% of net assets. Weak institutional demand
from mutual fund groups, combined with the reluctance of traditional
cross-over buyers to purchase municipal bonds because of future tax
considerations, has created a cloud over the demand side of the
market. If the market remains flat over the near term, the Fund
would benefit from its position of generating a higher current
return while sacrificing some ability to appreciate should a new
downward move in interest rates begin. In addition, should the US
economy start showing signs of rejuvenating later this year, the
Fund's structure would provide a cushion against possible negative
price action.
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
June 20, 1995
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:
<PAGE>
* 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 approximately 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% 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 Class C and Class D Shares are also presented below in the
"Aggregate Total Return" tables. Data for all of the Fund's shares
are presented in the "Recent Performance Results" table on page 3.
The "Recent Performance Results" table 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 May 31, 1995 and
for Class C and Class D Shares for the since inception and 3-month
periods ended May 31, 1995. 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. 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/95 +7.44% +3.14%
Inception (2/26/93)
through 3/31/95 +3.12 +1.13
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/95 +6.89% +2.89%
Inception (2/26/93)
through 3/31/95 +2.60 +1.67
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Aggregate Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94)
through 3/31/95 +5.86% +4.86%
[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*
Inception (10/21/94)
through 3/31/95 +6.33% +2.07%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
5/31/95 2/28/95 5/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.78 $9.54 $9.48 +3.16% +2.52%
Class B Shares* 9.78 9.54 9.48 +3.16 +2.52
Class C Shares* 9.77 9.53 9.19 +6.31 +2.52
Class D Shares* 9.78 9.55 9.19 +6.42 +2.41
Class A Shares--Total Return* +9.04(1) +3.87(2)
Class B Shares--Total Return* +8.49(3) +3.74(4)
Class C Shares--Total Return* +9.53(5) +3.72(6)
Class D Shares--Total Return* +9.98(7) +3.74(8)
Class A Shares--Standardized 30-day Yield 5.23%
Class B Shares--Standardized 30-day Yield 4.94%
Class C Shares--Standardized 30-day Yield 4.84%
Class D 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 shown for Class C and Class D Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.518 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.127 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.471 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.115 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.267 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.112 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.296 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.124 per share ordinary
income dividends.
</TABLE>
<PAGE>
PORTFOLIO COMPOSITION
For the Quarter Ended May 31, 1995
Distribution by Market Sector*
Other Revenue Bonds 41.8%
General Obligation & Tax Revenue Bonds 41.4
Utility Revenue Bonds 12.6
Prerefunded Bonds** 4.2
------
Total 100.0%
======
Net assets as of May 31, 1995 were $90,366,626.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
A pie chart illustrating the following percentages:
AAA/Aaa 82%
AA/Aa 2%
A/A 3%
BBB/Baa 2%
Other++ 8%
NR++++ 3%
[FN]
*Based on total market value of the portfolio as of May 31, 1995.
**Backed by an escrow fund.
++Temporary investments in short-term municipal securities.
++++Not Rated.
<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.
<PAGE>
Officers and Trustees
Arthur Zeikel, President and 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
Merrill Lynch
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>
