UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-04077
Name of Fund: Merrill Lynch U.S. Government Mortgage Fund
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief
Executive Officer, Merrill Lynch U.S. Government Mortgage
Fund, 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing
address: P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/05
Date of reporting period: 09/01/04 - 02/28/05
Item 1 - Report to Stockholders
Merrill Lynch
U.S. Government
Mortgage Fund
Semi-Annual Report
February 28, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
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.
A description of the policies and procedures that the Fund uses
to determine how to vote proxies relating to portfolio securities
is available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Merrill Lynch U.S. Government Mortgage Fund
Box 9011
Princeton, NJ
08543-9011
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A Letter From the President
Dear Shareholder
Financial markets broadly posted positive returns over the most
recent reporting period, with international equities providing some
of the most impressive results.
Total Returns as of February 28, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 9.99% + 6.98%
International equities (MSCI Europe Australasia Far East Index) +21.18 +18.68
Fixed income (Lehman Brothers Aggregate Bond Index) + 1.26 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.40 + 2.96
High yield bonds (Credit Suisse First Boston High Yield Index) + 7.53 +11.21
The U.S. economy has continued to show resilience in the face of the
Federal Reserve Board's (the Fed) continued interest rate hikes and,
more recently, higher oil prices. The Fed's measured tightening
program recently brought the federal funds rate to 2.75% en route to
a more "neutral" short-term interest rate target (relative to
inflation). Since the U.S. presidential election, progress has been
monitored on many fronts in Washington, although concerns remain
about the structural problems of debt and deficits, as reflected by
a significant decline in the U.S. dollar.
U.S. equities ended 2004 in a strong rally, but remained in a fairly
narrow trading range for the first two months of 2005. Divergences
were notable among sectors, with energy emerging as a clear leader.
On the positive side, corporations have accelerated their hiring
plans, capital spending remains reasonably robust and merger-and-
acquisition activity has increased. Offsetting the positives are
slowing corporate earnings growth, renewed energy price concerns and
the potential for an economic slowdown. International equities,
particularly in Asia, have benefited from higher economic growth
rates (China recorded growth of 9.3% in 2004), stronger currencies
and relatively reasonable valuations.
The major action in the bond market has been a flattening of the
yield curve. As short-term interest rates continued to rise, yields
on the long end of the curve remained relatively stable - even
declining at certain points since the Fed's monetary tightening
program began in June 2004. This phenomenon has been largely
attributed to continued foreign interest in U.S. bonds, which has
served to absorb much of the excess supply. By period-end, many
believed long-term yields were long overdue for a rise.
Looking ahead, the environment is likely to be a challenging one for
investors, with diversification and selectivity becoming
increasingly important themes. With this in mind, we encourage you
to meet with your financial advisor to review your goals and asset
allocation and to rebalance your portfolio, as necessary, to ensure
it remains aligned with your objectives and risk tolerance. As
always, we thank you for trusting Merrill Lynch Investment Managers
with your investment assets, and we look forward to serving you in
the months and years ahead.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
We are pleased to present to you the management team of
Merrill Lynch U.S. Government Mortgage Fund
Laura Powers, Frank Viola and Thomas Musmanno are portfolio managers
of Merrill Lynch U.S. Government Mortgage Fund. Ms. Powers, who
joined Merrill Lynch Investment Managers (MLIM) in 1988, received a
bachelor's degree from Winona State University and is a Certified
Public Accountant. Mr. Viola, who joined MLIM in 1997, earned a
bachelor's degree from The Pennsylvania State University and is a
CFA R charterholder, an associate of the Society of Actuaries and a
member of the American Academy of Actuaries. Mr. Musmanno, who
joined MLIM in 1993, received a bachelor's degree from Siena College
and an MBA from St. John's University. He is a CFA charterholder and
a member of the Association for Investment Management and Research
and the New York Society of Security Analysts.
Table of Contents
A Letter From the President 2
A Discussion With Your Fund's Portfolio Managers 4
Performance Data 6
Portfolio Information 8
Disclosure of Expenses 9
Schedule of Investments 10
Financial Statements 14
Financial Highlights 17
Notes to Financial Statements 22
Officers and Trustees 27
CFA R and Chartered Financial Analyst R are trademarks owned by the
Association for Investment Management and Research.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
A Discussion With Your Fund's Portfolio Managers
We ended the period with a positioning that favored commercial,
rather than residential mortgages, as we believe this offers the
portfolio greater protection against short-term interest rate
volatility.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended February 28, 2005, Merrill Lynch
U.S. Government Mortgage Fund's Class A, Class B, Class C, Class I
and Class R Shares had total returns of +.82%, +.56%, +.54%, +1.05%
and +.80%, respectively. (Fund results shown do not reflect sales
charges and would be lower if sales charges were included. Complete
performance information can be found on pages 6 - 8 of this report
to shareholders.) For the same period, the Fund's unmanaged
benchmark, the Citigroup Mortgage Index, returned +1.51%.
The economy remained relatively strong throughout the past six
months. Gross domestic product (GDP) grew at a rate of 4% in the
third quarter of 2004 and 3.8% in the fourth quarter. Real GDP
increased 4.4% in 2004 (that is, from the 2003 annual level to
the 2004 annual level), compared with an increase of 3% in 2003.
Job growth averaged 170,000 per month during the period. Stronger
retail sales combined with the year-over-year Consumer Price Index
increases averaging 3% monthly caused the Federal Reserve Board (the
Fed) to tighten the federal funds rate four times since the end of
August. This brought the federal funds rate to 2.50% at period-end,
and was followed by another 25 basis point hike on March 22. As
short-term interest rates increased, long-term interest rates
remained fairly stable, causing a flattening of the yield curve.
It appeared that investors believed the Fed was taking a proactive
stance against any potential inflation ramifications, supporting
higher bond prices and lower yields on the long end and a sell-off
on the short end.
One of the principal causes of the Fund's underperformance versus
the benchmark was our allocation to higher-coupon, short-duration
residential mortgages, which we held in anticipation of higher
interest rates at the long end of the curve. These securities
actually underperformed as the sell-off occurred at the short end of
the curve and financing opportunities available in these products
diminished during the period.
What changes were made to the portfolio during the period?
We began selling residential mortgages in favor of commercial
mortgages based on our view that short-dated volatility would be
increasing in the marketplace, therefore exposing the Fund to the
negative convexity associated with residential mortgages (that is,
the tendency for these issues to decrease in duration as interest
rates decline and increase as they rise). In order to better express
our view that the curve would flatten (as measured by the difference
between the 10-year and 30-year Treasury), we bought 30-year
Treasury bonds and used interest rate swaps to hedge some of the
10-year exposure embedded in the commercial mortgages. In addition
to commercial mortgages, we also started buying agency debentures to
provide better overall convexity. Agency debentures are the actual
debt issued by Fannie Mae or Freddie Mac and normally structured
with one principal payment.
How would you characterize the Fund's position at the close of the
period?
Our overall view of the market resulted in the previously mentioned
portfolio changes. We expect the Fed to continue to act aggressively
against inflation, resulting in a flatter yield curve as short-term
interest rates increase, and potentially higher short-term interest
rate volatility. This could negatively impact residential mortgage
performance. We will continue to overweight securities at the longer
end of our maturity range while maintaining a below-average exposure
to securities at the shorter end of our maturity range, particularly
the two-year sector. We will continue to underweight prepayment-
sensitive residential mortgage product in favor of more positively
convex agency commercial mortgage-backed product and agency debt.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
We also started to increase the Fund's overall level of yield by
purchasing structured investments. Over the next six months - 12
months, we believe yield will play an important role in the overall
total return of the Fund. Going forward, we expect to focus more on
yield-enhancing securities rather than total return or price return
opportunities.
Thomas Musmanno
Vice President and Co-Portfolio Manager
Laura Powers
Vice President and Co-Portfolio Manager
Frank Viola
Vice President and Co-Portfolio Manager
March 29, 2005
We are pleased to announce that Thomas Musmanno and Laura Powers
have been named Co-Portfolio Managers of the Fund, joining Frank
Viola in the day-to-day management of Merrill Lynch U.S. Government
Mortgage Fund. Mr. Musmanno has been a Director with Merrill Lynch
Investment Managers (MLIM) since 2004 and was a Vice President from
1996 to 2004. He has been the Derivatives and Structured Products
Specialist with MLIM since 2000 and has been a portfolio manager in
the fixed income management group since 1996. Ms. Powers has been a
Director of MLIM since 1998 and was a Vice President thereof from
1993 to 1997. She has been a member of the fixed income management
group since 1990.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple
pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and an account maintenance fee of 0.25% per year (but no
distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4%, declining to 0% after six years. All Class B Shares
purchased prior to December 1, 2002 will maintain the four-year
schedule. In addition, Class B Shares are subject to a distribution
fee of 0.50% per year and an account maintenance fee of 0.25% per
year. These shares automatically convert to Class A Shares after
approximately ten years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% per year
and an account maintenance fee of 0.25% per year. In addition, Class
C Shares are subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase.
* Class I Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class I Shares are available only to eligible investors, as
detailed in the Fund's prospectus.
* Class R Shares do not incur a maximum sales charge (front-end
load) or deferred sales charge. These shares are subject to a
distribution fee of 0.25% per year and an account maintenance fee of
0.25% per year. Class R Shares are available only to certain
retirement plans.
None of the past results shown should be considered a representation
of future performance. Current performance may be lower or higher
than the performance data quoted. Refer to www.mlim.ml.com to obtain
performance data current to the most recent month-end. Performance
results do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following tables assume reinvestment of
all dividends and capital gain distributions, if any, 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.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception Standardized
As of February 28, 2005 Total Return Total Return Total Return 30-Day Yield
ML U.S. Government Mortgage Fund Class A Shares* +0.82% +1.72% +82.08% 2.61%
ML U.S. Government Mortgage Fund Class B Shares* +0.56 +1.19 +73.08 2.20
ML U.S. Government Mortgage Fund Class C Shares* +0.54 +1.14 +72.21 2.15
ML U.S. Government Mortgage Fund Class I Shares* +1.05 +2.07 +86.86 2.85
ML U.S. Government Mortgage Fund Class R Shares* +0.80 +1.47 + 5.63 2.47
Citigroup Mortgage Index** +1.51 +3.33 +97.97/+8.29 --
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge
was included. Cumulative 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 10-year/since inception periods are 10 years for Class A, Class B,
Class C and Class I Shares and from 1/03/03 for Class R Shares.
** This unmanaged Index reflects the performance of a capital market weighting of the outstanding
agency-issued mortgage-backed securities. Ten-year/since inception total returns are for 10 years
and from 1/03/03.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 2/28/05 +1.72% -2.35%
Five Years Ended 2/28/05 +6.29 +5.42
Ten Years Ended 2/28/05 +6.18 +5.74
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 2/28/05 +1.19% -2.76%
Five Years Ended 2/28/05 +5.74 +5.42
Ten Years Ended 2/28/05 +5.64 +5.64
* Maximum contingent deferred sales charge is 4% and is reduced to
0% after six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 2/28/05 +1.14% +0.15%
Five Years Ended 2/28/05 +5.69 +5.69
Ten Years Ended 2/28/05 +5.59 +5.59
* Maximum contingent deferred sales charge is 1% and is reduced to
0% after one year.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
Class I Shares*
One Year Ended 2/28/05 +2.07% -2.01%
Five Years Ended 2/28/05 +6.55 +5.68
Ten Years Ended 2/28/05 +6.45 +6.02
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 2/28/05 +1.47%
Inception (1/03/03) through 2/28/05 +2.58
Portfolio Information as of February 28, 2005
Percent of
Asset Mix Total Investments
U.S. Government Agency Mortgage-Backed
Obligations 59.2%
Non-U.S. Government Agency Asset-Backed &
Mortgage-Backed Obligations 13.8
U.S. Government Agency Obligations 9.5
Other* 17.5
* Includes portfolio holdings in short-term investments.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Disclosure of Expenses
Shareholders of this Fund may incur the following charges:
(a) expenses related to transactions, including sales charges,
redemption fees and exchange fees; and (b) operating expenses
including advisory fees, distribution fees including 12(b)-1 fees,
and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on September 1, 2004 and
held through February 28, 2005) is intended to assist shareholders
both in calculating expenses based on an investment in the Fund and
in comparing these expenses with similar costs of investing in other
mutual funds.
The first table below provides information about actual account
values and actual expenses. In order to estimate the expenses a
shareholder paid during the period covered by this report,
shareholders can divide their account value by $1,000 and then
multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses. In order to assist shareholders in comparing the ongoing
expenses of investing in this Fund and other funds, compare the 5%
hypothetical example with the 5% hypothetical examples that appear
in other funds' shareholder reports.
The expenses shown in the table are intended to highlight
shareholders ongoing costs only and do not reflect any transactional
expenses, such as sales charges, redemption fees or exchange fees.
Therefore, the second table is useful in comparing ongoing expenses
only, and will not help shareholders determine the relative total
expenses of owning different funds. If these transactional expenses
were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value September 1, 2004
September 1, February 28, to February 28,
2004 2005 2005
Actual
Class A $1,000 $1,008.20 $4.98
Class B $1,000 $1,005.60 $7.56
Class C $1,000 $1,005.40 $7.81
Class I $1,000 $1,010.50 $3.74
Class R $1,000 $1,008.00 $6.22
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,019.84 $5.01
Class B $1,000 $1,017.26 $7.60
Class C $1,000 $1,017.01 $7.85
Class I $1,000 $1,021.08 $3.76
Class R $1,000 $1,018.60 $6.26
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.00% for Class A, 1.52% for Class B, 1.57% for Class C, .75% for Class I and 1.25% for Class R),
multiplied by the average account value over the period, multiplied by 181/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in
the most recent fiscal half-year divided by 365.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Schedule of Investments
Face Interest Original Maturity
Issue Amount Rate Date(s) Value
Non-U.S. Government Agency Asset-Backed & Mortgage-Backed Obligations*--15.9%
AmeriCredit Automobile Receivables Trust 04-BM-A2 $ 6,888,415 1.45 % 9/06/2007 $ 6,845,493
Ameriquest Mortgage Securities, Inc. 04-IA1-M1 11,250,000 3.45 (4) 9/25/2034 11,317,667
Bear Stearns Adjustable Rate Mortgage Trust 04-4-A4 47,823,000 3.51 (4) 6/25/2034 46,672,843
CS First Boston Mortgage Securities Corp. 04-TFLA-A2 5,000,000 2.78 (4) 2/15/2014 5,003,384
Centex Home Equity Loan Trust 04-B-AV1 8,967,030 2.85 (4) 3/25/2034 8,967,018
Countrywide Home Equity Loan Trust 04-K-2A 16,473,822 2.89 (4) 2/15/2034 16,502,149
Finance America Mortgage Loan Trust 04-1-2A1 4,667,855 2.82 (4) 6/25/2034 4,667,852
Indymac Home Equity Loan Asset-Backed Trust 04-B-A2A 14,353,865 2.84 (4) 11/25/2034 14,354,668
JPMorgan Chase Commercial Mortgage
Securities Corp. 04-FL1A1-A1 24,840,831 2.76 (4) 4/16/2019 24,865,187
MASTR Asset-Backed Securities Trust 04-HE1-A3 20,000,000 3.01 (4) 9/25/2034 20,064,412
Morgan Stanley Capital I 04-XLF-A2 7,500,000 2.82 (4) 4/15/2016 7,526,623
New Century Home Equity Loan Trust 04-3-A5 18,095,000 3.00 (4) 11/25/2034 18,146,001
Option One Mortgage Loan Trust 04-3-A2 5,367,105 2.80 (4) 11/25/2034 5,367,804
Residential Asset Mortgage Products, Inc. 04-RS9-AII2 8,000,000 2.99 (4) 5/25/2034 8,039,244
Residential Asset Securities Corp. 04-KS8-AI1 16,597,340 2.81 (4) 9/25/2022 16,600,233
Securitized Asset-Backed Receivables LLC Trust 04-OP1-A2 11,299,156 2.90 (4) 2/25/2034 11,298,835
Wachovia Bank Commercial Mortgage Trust 04-WL4A-A2 19,794,000 2.76 (4) 10/15/2015 19,816,848
Washington Mutual Pass-Through Certificates 04-AR12-A3 19,280,310 2.82 (4) 10/25/2044 19,434,290
Wells Fargo Home Equity Trust 04-2-A32 20,000,000 2.99 (4) 2/25/2032 20,062,820
Total Non-U.S. Government Agency Mortgage-Backed Obligations (Cost--$285,203,324) 285,553,371
U.S. Government & Agency Obligations--10.9%
Fannie Mae 40,000,000 4.625 (c) 10/15/2014 39,890,160
18,000,000 6.25 5/15/2029 20,885,292
Freddie Mac 100,000,000 2.75 (c) 10/15/2006 98,657,700
U.S. Treasury Bonds 27,000,000 5.375 2/15/2031 29,687,337
5,000,000 7.125 2/15/2023 6,408,010
Total U.S. Government & Agency Obligations (Cost--$196,685,502) 195,528,499
U.S. Government Agency Mortgage-Backed Obligations*--68.0%
Fannie Mae Guaranteed Pass-Through 24,716,877 4.50 9/01/2034 23,804,034
Certificates 18,210,232 5.00 5/01/2018 - 3/01/2020 18,393,010
19,554,151 5.00 7/01/2034 19,290,797
27,197,162 5.50 3/01/2032 - 3/15/2035 27,419,578
3,979,430 6.50 12/01/2008 - 2/01/2014 4,188,611
1,744,947 6.50 3/01/2033 1,818,325
9,128,834 7.50 7/01/2016 - 12/01/2032 9,775,554
28,056 8.00 9/01/2024 - 9/01/2027 30,321
1,611,806 8.50 (2) 8/01/2012 - 7/15/2023 1,768,443
432,972 11.00 2/01/2011 - 8/01/2020 475,594
303,827 13.00 9/01/2013 - 3/01/2015 343,545
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Schedule of Investments (continued)
Face Interest Original Maturity
Issue Amount Rate Date(s) Value
U.S. Government Agency Mortgage-Backed Obligations (continued)
Fannie Mae Guaranteed Pass-Through $ 5,247,850 4.28% (5) 2/01/2010 $ 5,189,966
Certificates--Multi-Family++ 3,493,712 4.62 (6) 11/01/2014 3,448,197
33,900,000 4.655 (6) 2/01/2015 33,490,488
9,856,000 4.68 (6) 2/01/2015 9,751,921
8,800,000 4.70 3/01/2015 8,715,696
6,482,150 4.72 (6) 3/01/2014 6,427,830
29,561,476 4.86 (6) 1/01/2015 29,682,679
24,200,000 4.86 (6) 2/01/2015 24,154,625
8,000,000 4.94 (6) 3/01/2015 8,060,000
8,995,187 5.01 (6) 1/01/2015 9,099,621
1,226,641 7.18 (3) 2/01/2019 1,350,546
Fannie Mae Guaranteed Pass-Through 03-W19-1A1 2,468,831 2.01 11/25/2033 2,464,088
Certificates--REMICS** 04-T9-A1 24,478,124 2.67 (4) 4/25/2035 24,476,932
04-29-FW 7,761,487 2.83 (4) 12/25/2017 7,773,945
04-61-TF 25,710,447 2.93 (4) 10/25/2031 25,824,465
03-41-YF 21,784,002 2.95 (4) 6/25/2028 21,819,179
Trust 273 330,949 7.00 (1) 7/01/2026 62,987
96-W1-AL 1,658,744 7.25 3/25/2026 1,760,643
Fannie Mae Guranteed Pass-Through 98-M1-IO2 47,621,653 0.686 (1)(4) 2/25/2013 1,239,792
Certificates--REMICS**--Multi-Family++ 97-M8-A2 1,883,014 7.16 (4) 1/25/2022 1,953,017
Freddie Mac Mortgage Participation 332 10.00 7/01/2019 370
Certificates 1,442,603 10.50 1/01/2010 - 9/01/2020 1,615,557
267,669 11.00 8/01/2010 - 9/01/2020 294,566
220,785 11.50 12/01/2011 - 6/01/2020 243,579
170,125 12.00 6/01/2013 - 6/01/2020 189,817
344,161 12.50 12/01/2015 - 7/01/2019 381,031
529,609 13.00 9/01/2010 - 2/01/2016 593,262
Freddie Mac Mortgage Participation 88,653,577 5.00 1/01/2019 - 11/01/2019 89,411,785
Certificates--Gold Program 116,188,953 5.00 12/01/2034 - 2/01/2035 114,776,315
13,147,510 5.50 3/01/2016 - 8/01/2019 13,491,508
199,147,229 5.50 1/01/2035 - 3/15/2035 201,021,609
8,053,348 6.00 3/01/2016 - 6/01/2017 8,372,127
60,283,420 6.00 1/01/2032 - 9/01/2034 61,934,055
3,297,208 6.50 8/01/2029 3,439,372
2,254,456 7.00 4/01/2032 2,376,138
1,468,055 7.50 5/01/2009 - 10/01/2011 1,550,441
23,925,224 7.50 8/01/2017 - 12/01/2032 25,610,508
1,640,300 8.00 1/01/2008 - 7/01/2012 1,736,460
2,779,911 8.00 10/01/2027 - 8/01/2032 2,993,897
407,629 8.50 1/01/2025 - 7/01/2025 449,992
193,994 10.50 10/01/2020 - 12/01/2020 221,639
Freddie Mac Mortgage Participation Trust H013 3,636,839 1.597 5/15/2010 3,597,862
Certificates--REMICS** Trust H016 2,566,620 1.758 1/15/2011 2,550,868
SF4-B 9,392,289 2.37 12/15/2009 9,247,279
Trust 2643-OF 30,192,233 2.94 (4) 7/15/2028 30,275,841
Trust 1220-A 561,699 10.00 2/15/2022 561,864
Trust 1220-B 4,567 874.075 (1)(4) 2/15/2022 55,713
Ginnie Mae MBS Certificates 49,621,195 5.00 12/15/2034 - 1/15/2035 49,445,547
486,096 5.50 3/15/2029 - 4/15/2029 495,665
12,931,460 5.60 1/15/2009 13,249,792
2,977,628 6.00 5/15/2024 - 11/15/2031 3,078,186
25,199,237 6.50 10/15/2023 - 3/15/2032 26,469,622
6,687,364 7.00 4/15/2023 - 4/15/2032 7,085,272
6,899,359 7.50 2/15/2025 - 12/15/2031 7,413,825
4,116,261 8.00 1/15/2024 - 8/15/2026 4,465,343
3,394,870 10.00 2/15/2016 - 12/15/2021 3,821,076
26,723 10.50 1/15/2016 - 4/15/2021 30,499
62 11.00 1/15/2016 69
877 11.50 8/15/2013 982
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Schedule of Investments (continued)
Face Interest Original Maturity
Issue Amount Rate Date(s) Value
U.S. Government Agency Mortgage-Backed Obligations (concluded)
Ginnie Mae MBS Certificates--REMICS** 05-09-IO $ 69,000,000 0.778% (1)(4) 1/16/2045 $ 4,010,625
04-77-IO 168,604,813 1.065 (1)(4) 9/16/2044 9,747,466
03-109-B 40,000,000 3.225 9/16/2021 38,745,576
04-103-A 9,928,287 3.878 12/16/2019 9,784,844
04-77-AB 39,544,736 4.368 11/16/2030 38,906,026
05-10-B 9,636,000 4.404 5/16/2024 9,485,038
04-97-C 8,400,000 4.522 (4) 2/16/2028 8,205,415
05-09-Z 5,000,000 4.65 (4) 1/16/2045 4,350,000
05-12-C 20,000,000 4.658 12/16/2030 19,667,180
05-09-C 8,000,000 4.917 (4) 2/16/2032 7,950,000
02-81-B 10,000,000 5.042 1/16/2029 10,008,857
05-10-ZB 2,750,559 5.175 (4) 12/16/2044 2,646,987
03-109-D 10,000,000 5.252 (4) 1/16/2034 10,087,507
01-58-C 20,000,000 5.499 (4) 8/16/2027 20,711,923
Total U.S. Government Agency Mortgage-Backed Obligations (Cost--$1,225,637,596) 1,220,911,206
Short-Term Securities--20.2%
U.S. Government Agency Obligations*** Fannie Mae 20,000,000 2.41 3/14/2005 19,982,594
Freddie Mac 305,000,000 2.42 3/14/2005 304,734,565
Beneficial
Interest
Merrill Lynch Liquidity Series, LLC Money Market
Series (a)(b) $ 31,118,750 31,118,750
Face
Amount Issue
Repurchase Agreements $6,000,000 Morgan Stanley & Co., Inc. purchased on 2/28/2005 to yield
2.60% to 3/01/2005, repurchase price $6,000,433, collateralized
by FNMA, 4.257% due 8/01/2034 6,000,000
Total Short-Term Securities (Cost--$361,835,910) 361,835,909
Total Investments--(Cost--$2,069,362,332++++)--115.0% 2,063,828,985
Liabilities in Excess of Other Assets--(15.0%) (268,599,752)
----------------
Net Assets--100.0% $ 1,795,229,233
================
++ Underlying multi-family loans have prepayment protection by means
of lockout periods and/or yield maintenance premiums.
++++ The cost and unrealized appreciation (depreciation) of investments as
of February 28, 2005, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 2,069,451,402
=================
Gross unrealized appreciation $ 5,453,729
Gross unrealized depreciation (11,076,146)
-----------------
Net unrealized depreciation $ (5,622,417)
=================
* Asset-Backed and 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.
** Real Estate Mortgage Investment Conduits (REMIC).
*** U.S. Government Agency Obligations are traded on a discount basis;
the interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
(1) Represents the interest only portion of a mortgage-backed
obligation.
(2) Federal Housing Administration/Veterans Administration Mortgages
packaged by the Federal National Mortgage Association.
(3) Represents a balloon mortgage that amortizes on a 22-year schedule
and has a 22-year original maturitiy.
(4) Floating rate note.
(5) Represents a balloon mortgage that amortizes on a 30-year schedule
and has a 7-year original maturity.
(6) Represents a balloon mortgage that amortizes on a 30-year schedule
and has a 10-year original maturity.
(a) Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) were as follows:
Interest/
Net Dividend
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Money Market Series $ 31,118,750 $ 9,402
Merrill Lynch Premier Institutional
Fund (10,600,000) $ 26,752
(b) Security was purchased with the cash proceeds from securities loans.
(c) Security, or a portion of security, is on loan.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Schedule of Investments (concluded)
Swaps outstanding as of February 28, 2005 were as follows:
Notional Unrealized
Amount Appreciation
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .125%
Broker, Lehman Brothers
Special Finance
Expires March 2005 $100,000,000 --
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .125%
Broker, Lehman Brothers
Special Finance
Expires April 2005 $ 72,000,000 --
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .125%
Broker, Lehman Brothers
Special Finance
Expires April 2005 $100,000,000 --
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .12%
Broker, UBS Warburg
Expires May 2005 $ 50,000,000 --
Notional Unrealized
Amount Appreciation
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .105%
Broker, UBS Warburg
Expires August 2005 $ 80,000,000 --
Receive (pay) a variable return
equal to the change in the Lehman
Brothers Mortgage-Backed Securities
Fixed Rate Index Total Return and
pay a floating rate based on
1-month USD LIBOR, minus .10%
Broker, Lehman Brothers
Special Finance
Expires September 2005 $100,000,000 --
Receive a variable return equal
to 3-month USD LIBOR and
pay a fixed rate of 3.4775%
Broker, Lehman Brothers
Special Finance
Expires September 2008 $ 40,000,000 $ 998,286
Receive a variable return equal
to 3-month USD LIBOR and
pay a fixed rate of 4.3575%
Broker, Lehman Brothers
Special Finance
Expires February 2015 $ 12,000,000 403,604
-----------
Total $ 1,401,890
===========
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Statement of Assets and Liabilities
As of February 28, 2005
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $29,932,150) (identified cost--$2,038,243,582) $ 2,032,710,235
Investments in affiliated securities, at value (identified cost--$31,118,750) 31,118,750
Unrealized appreciation on swaps 1,401,890
Cash 2,823,351
Receivables:
Interest $ 6,711,755
Beneficial interest sold 1,981,785
Principal paydowns 1,127,012
Securities lending 7,173 9,827,725
---------------
Prepaid expenses 80,551
---------------
Total assets 2,077,962,502
---------------
Liabilities
Collateral on securities loaned, at value 31,118,750
Payables:
Securities purchased 239,454,575
Beneficial interest redeemed 5,748,585
Swaps 3,065,940
Dividends to shareholders 1,043,314
Other affiliates 999,903
Distributor 546,839
Investment adviser 510,687
Variation margin 1,652 251,371,495
---------------
Accrued expenses 243,024
---------------
Total liabilities 282,733,269
---------------
Net Assets
Net assets $ 1,795,229,233
===============
Net Assets Consist of
Class A Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 7,466,114
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 3,719,688
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 2,650,521
Class I Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 3,597,994
Class R Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 140,870
Paid-in capital in excess of par 1,775,824,531
Accumulated distributions in excess of investment income--net $ (1,176,021)
Undistributed realized capital gains--net 7,136,993
Unrealized depreciation--net (4,131,457)
---------------
Total accumulated earnings--net 1,829,515
---------------
Net Assets $ 1,795,229,233
===============
Net Asset Value
Class A--Based on net assets of $762,586,483 and 74,661,135 shares of
beneficial interest outstanding $ 10.21
===============
Class B--Based on net assets of $379,951,607 and 37,196,875 shares of
beneficial interest outstanding $ 10.21
===============
Class C--Based on net assets of $270,704,892 and 26,505,212 shares of
beneficial interest outstanding $ 10.21
===============
Class I--Based on net assets of $367,617,499 and 35,979,939 shares of
beneficial interest outstanding $ 10.22
===============
Class R--Based on net assets of $14,368,752 and 1,408,704 shares of
beneficial interest outstanding $ 10.20
===============
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Statement of Operations
For the Six Months Ended February 28, 2005
Investment Income
Interest $ 33,880,236
Securities lending--net 36,154
---------------
Total income 33,916,390
---------------
Expenses
Investment advisory fees $ 4,253,952
Account maintenance and distribution fees--Class B 1,536,439
Account maintenance and distribution fees--Class C 1,145,603
Account maintenance fees--Class A 963,997
Transfer agent fees--Class A 828,411
Transfer agent fees--Class B 481,643
Transfer agent fees--Class I 374,206
Transfer agent fees--Class C 343,602
Accounting services 257,021
Custodian fees 105,684
Printing and shareholder reports 54,140
Professional fees 49,134
Pricing fees 48,542
Registration fees 42,278
Trustees' fees and expenses 27,567
Account maintenance and distribution fees--Class R 27,467
Transfer agent fees--Class R 11,749
Other 36,416
---------------
Total expenses 10,587,851
---------------
Investment income--net 23,328,539
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on:
Investments--net 26,920,836
Futures contracts and swaps--net 65,509
Options--net 123,994
Short sales--net 8,281 27,118,620
---------------
Change in unrealized appreciation (depreciation) on:
Investments--net (37,047,617)
Futures contracts and swaps--net 1,987,351 (35,060,266)
--------------- ---------------
Total realized and unrealized loss--net (7,941,646)
---------------
Net Increase in Net Assets Resulting from Operations $ 15,386,893
===============
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income--net $ 23,328,539 $ 50,565,902
Realized gain--net 27,118,620 10,222,989
Change in unrealized appreciation (depreciation)--net (35,060,266) 27,462,524
--------------- ---------------
Net increase in net assets resulting from operations 15,386,893 88,251,415
--------------- ---------------
Dividends to Shareholders
Investment income--net:
Class A (13,950,294) (23,500,858)
Class B (6,306,318) (11,684,031)
Class C (4,336,575) (7,884,557)
Class I (6,736,564) (10,070,313)
Class R (195,070) (83,884)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (31,524,821) (53,223,643)
--------------- ---------------
Beneficial Interest Transactions
Net decrease in net assets derived from beneficial interest transactions (85,120,105) (328,542,585)
--------------- ---------------
Net Assets
Total decrease in net assets (101,258,033) (293,514,813)
Beginning of period 1,896,487,266 2,190,002,079
--------------- ---------------
End of period* $ 1,795,229,233 $ 1,896,487,266
=============== ===============
* Accumulated distributions in excess of investment income/undistributed
investment income--net $ (1,176,021) $ 7,020,261
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Financial Highlights
Class A
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 10.31 $ 10.13 $ 10.25 $ 9.95 $ 9.44
---------- ---------- ---------- ---------- ----------
Investment income--net .14++ .27++ .32 .43 .55
Realized and unrealized gain (loss)--net (.05) .19 (.12) .30 .51
---------- ---------- ---------- ---------- ----------
Total from investment operations .09 .46 .20 .73 1.06
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.19) (.28) (.32) (.43) (.55)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 10.21 $ 10.31 $ 10.13 $ 10.25 $ 9.95
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share .82%+++ 4.63% 1.93% 7.54% 11.49%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.00%* .98% .95% .97% 1.00%
========== ========== ========== ========== ==========
Investment income--net 2.72%* 2.65% 3.09% 4.30% 5.59%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 762,586 $ 798,279 $ 855,543 $ 819,410 $ 729,136
========== ========== ========== ========== ==========
Portfolio turnover 241.44% 508.54% 428.59% 426.77% 199.30%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Financial Highlights (continued)
Class B
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 10.31 $ 10.13 $ 10.26 $ 9.95 $ 9.44
---------- ---------- ---------- ---------- ----------
Investment income--net .11++ .22++ .26 .38 .50
Realized and unrealized gain (loss)--net (.05) .19 (.13) .31 .51
---------- ---------- ---------- ---------- ----------
Total from investment operations .06 .41 .13 .69 1.01
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.16) (.23) (.26) (.38) (.50)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 10.21 $ 10.31 $ 10.13 $ 10.26 $ 9.95
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share .56%+++ 4.09% 1.40% 6.99% 10.91%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.52%* 1.50% 1.47% 1.49% 1.52%
========== ========== ========== ========== ==========
Investment income--net 2.19%* 2.14% 2.58% 3.76% 5.07%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 379,952 $ 438,679 $ 591,435 $ 613,282 $ 466,432
========== ========== ========== ========== ==========
Portfolio turnover 241.44% 508.54% 428.59% 426.77% 199.30%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Financial Highlights (continued)
Class C
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 10.31 $ 10.13 $ 10.25 $ 9.95 $ 9.44
---------- ---------- ---------- ---------- ----------
Investment income--net .11++ .21++ .26 .37 .49
Realized and unrealized gain (loss)--net (.05) .19 (.12) .30 .51
---------- ---------- ---------- ---------- ----------
Total from investment operations .06 .40 .14 .67 1.00
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.16) (.22) (.26) (.37) (.49)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 10.21 $ 10.31 $ 10.13 $ 10.25 $ 9.95
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share .54%+++ 4.03% 1.35% 6.94% 10.86%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.57%* 1.55% 1.52% 1.54% 1.57%
========== ========== ========== ========== ==========
Investment income--net 2.14%* 2.09% 2.52% 3.40% 5.00%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 270,705 $ 301,532 $ 414,539 $ 384,119 $ 56,706
========== ========== ========== ========== ==========
Portfolio turnover 241.44% 508.54% 428.59% 426.77% 199.30%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Financial Highlights (continued)
Class I
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 10.31 $ 10.13 $ 10.26 $ 9.95 $ 9.44
---------- ---------- ---------- ---------- ----------
Investment income--net .15++ .29++ .34 .46 .57
Realized and unrealized gain (loss)--net (.04) .20 (.13) .31 .51
---------- ---------- ---------- ---------- ----------
Total from investment operations .11 .49 .21 .77 1.08
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.20) (.31) (.34) (.46) (.57)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 10.22 $ 10.31 $ 10.13 $ 10.26 $ 9.95
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 1.05%+++ 4.89% 2.08% 7.91% 11.77%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses .75%* .73% .70% .72% .75%
========== ========== ========== ========== ==========
Investment income--net 2.97%* 2.89% 3.34% 4.53% 5.84%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 367,617 $ 349,958 $ 328,408 $ 296,305 $ 234,930
========== ========== ========== ========== ==========
Portfolio turnover 241.44% 508.54% 428.59% 426.77% 199.30%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Financial Highlights (concluded)
Class R
For the Period
For the Six For the Year January 3,
Months Ended Ended 2003++ to
The following per share data and ratios have been derived February 28, August 31, August 31,
from information provided in the financial statements. 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 10.29 $ 10.12 $ 10.31
------------ ------------ ------------
Investment income--net .13+++ .23+++ .24
Realized and unrealized gain (loss)--net (.05) .20 (.19)
------------ ------------ ------------
Total from investment operations .08 .43 .05
------------ ------------ ------------
Less dividends from investment income--net (.17) (.26) (.24)
------------ ------------ ------------
Net asset value, end of period $ 10.20 $ 10.29 $ 10.12
============ ============ ============
Total Investment Return**
Based on net asset value per share .80%+++++ 4.34% .44%+++++
============ ============ ============
Ratios to Average Net Assets
Expenses 1.25%* 1.21% 1.23%*
============ ============ ============
Investment income--net 2.52%* 2.25% 2.81%*
============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 14,369 $ 8,040 $ 77
============ ============ ============
Portfolio turnover 241.44% 508.54% 428.59%
============ ============ ============
* Annualized.
** Total investment returns exclude the effects of sales charges.
++ Commencement of operations.
+++ Based on average shares outstanding.
+++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch U.S. Government Mortgage Fund (the "Fund") is
registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The
Fund's financial statements are prepared in conformity with U.S.
generally accepted accounting principles which may require the use
of management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund offers
multiple classes of shares. Shares of Class A and Class I are sold
with a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. Class R Shares are
sold only to certain retirement plans. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class A, Class B, Class C
and Class R Shares bear certain expenses related to the account
maintenance of such shares, and Class B, Class C and Class R Shares
also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures (except that Class B shareholders may vote on certain
changes to the Class A distribution plan). Income, expenses (other
than expenses attributable to a specific class) and realized and
unrealized gains and losses are allocated daily to each class based
on its relative net assets. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Debt securities are traded primarily
in the over-the-counter markets and are valued at the last available
bid price in the over-the-counter market or on the basis of values
obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and
valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general direction of the Board of Trustees. Such valuations and
procedures will be reviewed periodically by the Board of Trustees
of the Fund. Financial futures contracts and options thereon, which
are traded on exchanges, are valued at their closing prices as of
the close of such exchanges. Options written or purchased are valued
at the last sale price in the case of exchange-traded options. In
the case of options traded in the over-the-counter ("OTC") market,
valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued by quoted
fair valuations received daily by the Fund from the counterparty.
Short-term investments with a remaining maturity of 60 days or less
are valued at amortized cost, which approximates market value, under
which method the investment is valued at cost and any premium or
discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest.
Investments in open-end investment companies are valued at their
net asset value each business day. Securities and other assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Trustees of the Fund.
Equity securities that are held by the Fund that are traded on stock
exchanges or the Nasdaq National Market are valued at the last sale
price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions, and at
the last available ask price for short positions. In cases where
equity securities are traded on more than one exchange, the
securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Trustees of the
Fund. Long positions traded in the OTC market, Nasdaq Small Cap or
Bulletin Board are valued at the last available bid price obtained
from one or more dealers or pricing services approved by the Board
of Trustees of the Fund. Short positions traded in the OTC market
are valued at the last available ask price. Portfolio securities
that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in
computing the net asset value of the Fund's shares are determined as
of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and
the close of business on the NYSE that may not be reflected in the
computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value
of such securities, those securities may be valued at their fair
value as determined in good faith by the Fund's Board of Trustees or
by the Investment Adviser using a pricing service and/or procedures
approved by the Fund's Board of Trustees.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Notes to Financial Statements (continued)
(b) Repurchase agreements--The Fund may invest in U.S. government
securities pursuant to repurchase agreements. Under such agreements,
the counterparty agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the
underlying securities, marks-to-market such securities and, if
necessary, receives additional securities daily to ensure that the
contract is fully collateralized. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the
collateral by the Fund may be delayed or limited.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the return of the
Fund and to hedge, or protect, its exposure to interest rate
movements and movements in the securities markets. Losses may arise
due to changes in the value of the contract or if the counterparty
does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts.
Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
* Options--The Fund may write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-
market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premiums paid or received).
Written and purchased options are non-income producing investments.
* Swaps--The Fund may enter into swap agreements, which are over-the-
counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by
a predetermined credit event. The net periodic payments may be based
on a fixed or variable interest rate; the change in market value of
a specified security, basket of securities, or index; or the return
generated by a security. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as
realized gains or losses, respectively. Gains or losses are also
realized upon termination of the swap agreements. Swaps are marked-
to-market daily based on dealer-supplied valuations and changes
in value are recorded as unrealized appreciation (depreciation).
Risks include changes in the returns of the underlying instruments,
failure of the counterparties to perform under the contracts' terms
and the possible lack of liquidity with respect to the swap
agreements.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Interest income and
extended delivery fees are recognized on the accrual basis. The Fund
amortizes all premiums and discounts on debt securities.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Notes to Financial Statements (continued)
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
(h) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, it collects a fee from the borrower. The
Fund typically receives the income on the loaned securities but does
not receive the income on the collateral. Where the Fund receives
cash collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access
to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.
(i) Mortgage dollar rolls--The Fund may sell mortgage-backed
securities for delivery in the current month and simultaneously
contract to repurchase substantially similar (same type, coupon and
maturity) securities on a specific future date.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM
is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plan with FAM Distributors, Inc. ("FAMD"
or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following rate:
Portion of Average Daily Value of Net Assets: Rate
Not exceeding $500 million .500%
In excess of $500 million but not
exceeding $1 billion .475%
In excess of $1 billion but not
exceeding $1.5 billion .450%
In excess of $1.5 billion but not
exceeding $2 billion .425%
In excess of $2 billion but not
exceeding $2.5 billion .400%
In excess of $2.5 billion but not
exceeding $3.5 billion .375%
In excess of $3.5 billion but not
exceeding $5 billion .350%
In excess of $5 billion but not
exceeding $6.5 billion .325%
Exceeding $6.5 billion .300%
Pursuant to the Distribution Plan adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .50%
Class C .25% .55%
Class R .25% .25%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of
FAM, also provides account maintenance and distribution services
to the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class A, Class B, Class C and Class R shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B,
Class C and Class R shareholders.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Notes to Financial Statements (continued)
For the six months ended February 28, 2005, FAMD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class I Shares as
follows:
FAMD MLPF&S
Class A $ 1,044 $ 8,848
Class I $ 2 $ 25
For the six months ended February 28, 2005, MLPF&S received
contingent deferred sales charges of $283,775 and $3,814 relating
to transactions in Class B and Class C Shares, respectively.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. Pursuant to that order, the Fund also has
retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of FAM, as the securities lending agent for a fee based on
a share of the returns on investment of cash collateral. MLIM LLC
may, on behalf of the Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates. For the six months ended February
28, 2005, MLIM, LLC received $13,561 in securities lending agent
fees.
For the six months ended February 28, 2005, the Fund reimbursed MLIM
$19,508 for certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, FAMD, FDS, and/or ML & Co.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding
short-term securities, for the six months ended February 28, 2005
were $4,468,899,755 and $4,762,979,032, respectively.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $85,120,105 and $328,542,585 for the six months
ended February 28, 2005 and for the year ended August 31, 2004,
respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 6,755,429 $ 69,538,143
Automatic conversion of shares 779,106 8,029,832
Shares issued to shareholders
in reinvestment of dividends 558,863 5,750,439
-------------- ---------------
Total issued 8,093,398 83,318,414
Shares redeemed (10,891,351) (112,136,692)
-------------- ---------------
Net decrease (2,797,953) $ (28,818,278)
============== ===============
Class A Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 15,955,583 $ 163,141,791
Automatic conversion of shares 2,043,991 20,880,726
Shares issued to shareholders
in reinvestment of dividends 1,004,421 10,285,233
-------------- ---------------
Total issued 19,003,995 194,307,750
Shares redeemed (26,004,015) (265,728,253)
-------------- ---------------
Net decrease (7,000,020) $ (71,420,503)
============== ===============
Class B Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 2,052,697 $ 21,146,734
Shares issued to shareholders
in reinvestment of dividends 450,954 4,639,513
-------------- ---------------
Total issued 2,503,651 25,786,247
-------------- ---------------
Automatic conversion of shares (779,106) (8,029,832)
Shares redeemed (7,091,103) (73,038,690)
-------------- ---------------
Total redeemed (7,870,209) (81,068,522)
-------------- ---------------
Net decrease (5,366,558) $ (55,282,275)
============== ===============
Class B Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 5,582,565 $ 57,115,360
Shares issued to shareholders
in reinvestment of dividends 844,324 8,648,702
-------------- ---------------
Total issued 6,426,889 65,764,062
-------------- ---------------
Automatic conversion of shares (20,203,533) (206,479,766)
Shares redeemed (2,043,898) (20,880,726)
-------------- ---------------
Total redeemed (22,247,431) (227,360,492)
-------------- ---------------
Net decrease (15,820,542) $ (161,596,430)
============== ===============
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Notes to Financial Statements (concluded)
Class C Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 1,894,779 $ 19,509,225
Shares issued to shareholders
in reinvestment of dividends 314,104 3,231,450
-------------- ---------------
Total issued 2,208,883 22,740,675
Shares redeemed (4,964,021) (51,120,032)
-------------- ---------------
Net decrease (2,755,138) $ (28,379,357)
============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 3,281,754 $ 33,583,925
Shares issued to shareholders
in reinvestment of dividends 566,068 5,796,384
-------------- ---------------
Total issued 3,847,822 39,380,309
Shares redeemed (15,513,398) (158,579,358)
-------------- ---------------
Net decrease (11,665,576) $ (119,199,049)
============== ===============
Class I Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 8,159,363 $ 84,016,232
Shares issued to shareholders
in reinvestment of dividends 20,266 208,548
-------------- ---------------
Total issued 8,179,629 84,224,780
Shares redeemed (6,145,870) (63,319,892)
-------------- ---------------
Net increase 2,033,759 $ 20,904,888
============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 11,818,884 $ 120,972,566
Shares issued to shareholders
in reinvestment of dividends 41,314 423,214
-------------- ---------------
Total issued 11,860,198 121,395,780
Shares redeemed (10,323,699) (105,644,634)
-------------- ---------------
Net increase 1,536,499 $ 15,751,146
============== ===============
Class R Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 874,794 $ 8,998,134
Shares issued to shareholders
in reinvestment of dividends 17,872 183,639
-------------- ---------------
Total issued 892,666 9,181,773
Shares redeemed (265,178) (2,726,856)
-------------- ---------------
Net increase 627,488 $ 6,454,917
============== ===============
Class R Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 949,466 $ 9,714,926
Shares issued to shareholders
in reinvestment of dividends 7,660 78,178
-------------- ---------------
Total issued 957,126 9,793,104
Shares redeemed (183,511) (1,870,853)
-------------- ---------------
Net increase 773,615 $ 7,922,251
============== ===============
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its
affiliates, is a party to a $500,000,000 credit agreement with a
group of lenders. The Fund may borrow under the credit agreement to
fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount
allowable under the Fund's current prospectus and statement of
additional information, subject to various other legal, regulatory
or contractual limits. The Fund pays a commitment fee of .07% per
annum based on the Fund's pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement
bear interest at a rate equal to, at each Fund's election, the
federal funds rate plus .50% or a base rate as defined in the credit
agreement. The Fund did not borrow under the credit agreement during
the six months ended February 28, 2005. On November 26, 2004, the
credit agreement was renewed for one year under substantially the
same terms.
6. Capital Loss Carryforward:
On August 31, 2004, the Fund had a net capital loss carryforward of
$8,462,695, of which $4,697,041 expires in 2008 and $3,765,654
expires in 2009. This amount will be available to offset like
amounts of any future taxable gains.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
James H. Bodurtha, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Stephen B. Swensrud, Trustee
Thomas Musmanno, Vice President
Laura Powers, Vice President
Frank Viola, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Andre F. Perold resigned as a Trustee of Merrill Lynch U.S.
Government Mortgage Fund effective October 22, 2004.
Effective January 1, 2005, Terry K. Glenn retired as President and
Trustee of the Fund. The Fund's Board of Trustees wishes Mr. Glenn
well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Trustee of the Fund.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site at
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
MERRILL LYNCH U.S. GOVERNMENT MORTGAGE FUND, FEBRUARY 28, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Merrill Lynch U.S. Government Mortgage Fund
By: _/s/ Robert C. Doll, Jr._______
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch U.S. Government Mortgage Fund
Date: April 22, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Robert C. Doll, Jr.________
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch U.S. Government Mortgage Fund
Date: April 22, 2005
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch U.S. Government Mortgage Fund
Date: April 22, 2005