[logo] M F S(R)
INVESTMENT MANAGEMENT
MFS(R) GOVERNMENT
MARKETS INCOME TRUST
SEMIANNUAL REPORT o MAY 31, 2001
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 13
Notes to Financial Statements ............................................. 17
Trustees and Officers ..................................................... 23
MFS(R) PRIVACY POLICY
At MFS(R), we are committed to protecting your privacy.
On behalf of the MFS Family of Funds(R), the MFS(R) Institutional Trust Funds,
the Vertex(SM) Funds, the MFS(R) Closed-end Funds,(1) Massachusetts Financial
Services Company, and certain affiliates(2) (collectively, "MFS," "we," "us"
or "our"), this privacy policy outlines certain of our policies designed to
maintain the privacy of your nonpublic personal information.
Nonpublic personal information includes much of the information you provide to
us and the related information about you and your transactions involving your
MFS investment products or services. Examples of nonpublic personal
information include the information you provide on new account applications
for MFS investment products or services, your share balance or transactional
history, and the fact that you are a customer of MFS.
We may collect nonpublic personal information about you from the following
sources:
o information we receive from you on applications or other forms
o information about your transactions with us, our affiliates, or others, and
o information we receive from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may disclose all of
the information we collect, as described above, to companies that perform
marketing services on our behalf or to other financial institutions with whom
we have joint marketing arrangements.
We restrict access to nonpublic personal information about you to personnel
who are necessary or appropriate to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.
Our privacy policy applies only to individual MFS investors who have a direct
relationship with us. If you own MFS products or receive MFS investment
services in the name of a third-party broker/dealer, bank, investment adviser
or other financial service provider, that third-party's privacy policies may
apply to you and our privacy policy may not.
If you have any questions with respect to MFS' privacy policy, please call
1-800-637-2304
any business day between 8 a.m. and 8 p.m. Eastern time.
(1) MFS(R) Charter Income Trust, MFS(R) Government Markets Income Trust, MFS(R)
Intermediate Income Trust, MFS(R) Multimarket Income Trust, MFS(R)
Municipal Income Trust, MFS(R) Special Value Trust.
(2) MFS Institutional Advisors, Inc., Vertex Investment Management, Inc., MFS
Original Research Advisors, LLC, MFS Original Research Partners, LLC,
MFS(R) Heritage Trust Company(SM), and MFS Fund Distributors, Inc.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
When we talk to you about the information you want from MFS(R), you tell us
you're looking for answers to three basic questions:
1. How is my money being managed, over both the short and the long term?
2. What's going on in the market, and how will that affect me?
3. How can I get more out of my relationship with my investment professional?
Traditionally, we've attempted to answer these and other questions through a
range of printed materials sent through the mail, including statements and
annual and semiannual reports. As the Internet has reached an ever-larger
percentage of households, however, we and most other investment management
firms have come to believe that the Web can be an additional -- and
potentially more effective -- way to communicate with investors.
The Internet holds the promise of near-instantaneous delivery, communication
when you want it rather than when we mail it, easy access to the specific
information you want, and an experience customized to each investor. With the
relaunch of our Web site, WWW.MFS.COM, earlier this year, we believe we've
moved a giant step closer to delivering the Internet's promise and created a
site that we're committed to improving every day. Our site now makes it easy
for you to find answers to your three basic questions.
HOW IS MY MONEY BEING MANAGED?
One of the most exciting features of our site is MFS(R) Interactive(SM): One
click to an expert(SM) -- a series of video interviews with MFS portfolio
managers and executives. Located in the "Investor Education" section of the
site, MFS Interactive uses video streamed over the Web to allow you to see and
hear from the people who are managing your money, to give you greater insight
into our investment approach and our response to market conditions. MFS
Interactive includes "Meet the Manager" interviews that cover the background
and investment style of a particular portfolio manager, as well as other
Webcasts that cover a specific fund or investment topic.
WHAT'S GOING ON IN THE MARKET, AND HOW WILL THAT AFFECT ME?
In our view, the tougher the market, the more you need to hear from the people
who are managing your money -- and the past year or so has certainly been one
of the toughest markets in recent memory. We think the immediacy of the Web
provides an ideal way to communicate with you frequently and to offer our
views on the current volatility and uncertainty in the market. On your "My
MFS" homepage, in many MFS Interactive interviews, and in the "News &
Commentary" section of the site, you'll find our views on the current
situation and our market outlook. Our goal is to help you understand what's
going on and help you make decisions based on facts and market history, rather
than on the emotion of the moment.
HOW CAN I GET MORE OUT OF MY RELATIONSHIP WITH MY INVESTMENT PROFESSIONAL?
Perhaps your best resource in a tough market is your own investment
professional. This is the person who may have the best understanding of your
financial goals and your unique financial situation. In our view, the Web is
incredible at delivering information, but it cannot take the place of an
investment professional working with you to incorporate that information into
a long-range financial plan -- a plan that may help you weather market
volatility and help you work toward reaching your own financial goals.
To a large degree, the MFS Web site is about preparing you to have a deeper
dialogue with your investment professional. We believe that if we can help you
"do your homework," you'll be able to spend less time with your investment
professional simply getting information and more time creating a financial
plan and making investment decisions.
On a final note, we want to assure you that our commitment to the Internet
does not signal a lessening of our commitment to other forms of communication.
If you're not yet connected to the Web, rest assured that we will continue to
strive to deliver outstanding communications in print and on the phone, as
well as electronically. We hope, however, that as we continue to improve our
site, we will give you more and more incentive to take advantage of the
opportunities that the Web offers investors.
For some time, I've ended my letters to you by saying that we appreciate your
confidence in MFS and welcome any questions or comments you may have. With the
relaunched WWW.MFS.COM, there is now an easy way for you to e-mail us those
questions or comments and receive a reply. Simply click on "Contact Us" at the
top of our homepage. We look forward to hearing from you.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
May 15, 2001
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the six months ended May 31, 2001, the trust provided a total return of
8.05% based on its beginning and ending stock market prices and assuming the
reinvestment of any distributions paid during the period. The trust's total
return based on its net asset value (NAV) was 4.38%. During the same period, the
Salomon Brothers Medium Term (1- to 10-year) Treasury Government Sponsored Index
(the Salomon Index), an unmanaged index, which includes bonds issued by the U.S.
government or by government agencies with a maturity range greater than or equal
to one year and less than 10 years, returned 5.37%. The J.P. Morgan Non-dollar
Government Bond Index (Morgan Index), an unmanaged index of actively traded
government bonds issued by 12 countries (excluding the United States) with
remaining maturities of at least one year, returned -1.29% over the same period.
A very aggressive program of cuts in interest rates by the Federal Reserve
Board (the Fed) highlighted the period. With inflation remaining benign, the
Fed turned its focus toward easing monetary policy in order to support growth.
Overall, the Fed cut the federal funds target rate from 6.5% to 4% during the
period, including two surprise cuts of 0.50 percentage points implemented
between regularly scheduled meetings. By acting this dramatically, the Fed
demonstrated its forcefulness and indicated its intent to do whatever it takes
to sustain growth. A sharp decline in corporate spending -- particularly for
technology products and services -- was the main culprit that slowed economic
growth. While consumer spending and construction remained strong, consumer
confidence waned in the face of rising unemployment.
During the period, sharp declines in short-term interest rates caused the
yield curve -- a representation of the difference between short- and long-term
rates -- to steepen. Within this backdrop, we've positioned the portfolio to
take advantage of such a scenario. That approach called for a "bulleted"
structure, where we targeted certain parts of the yield curve, including more
exposure to bonds with maturities in the one- to three-year range. As far as
sector allocation was concerned, we underweighted mortgage-backed securities
(MBSs) substantially. Within a falling-rate environment, MBSs are unattractive
due to increased refinancing activity. Mortgage holders tend to pay off their
loans early in order to take advantage of lower borrowing costs, and the
holder of the MBS is then left to reinvest the principal at lower prevailing
rates.
Looking at the portfolio's international component, it's important to note
that we only venture overseas if we feel alternatives there offer the
opportunity to outperform domestic bonds. That said, we devoted only a small
portion of the portfolio to both developed and developing country bonds
because we held a very favorable view of the opportunities available in the
United States. Within the developed world, we favored bonds offered by the
dollar-bloc countries, including the United States, Australia, New Zealand,
and Canada.
These markets performed best among government issuers in 2000. We also kept a
very small position in Europe, with the exception of Greece, which was our
largest European holding. Overall, Europe has been less appealing to us
because growth there has been stronger than in the United States for the first
time since 1991. As a result, the ensuing inflation has made it difficult for
the European Central Bank to justify interest rate cuts. Greece performed well
due to the positive effects of its inclusion into the European Monetary Union
(EMU). We did not invest in Japan, because yields there were very low and
would not have provided us with adequate income in our opinion. Our small
emerging market position was largely focused on very short-term Mexican paper,
a higher-quality investment that was meant to add diversity to the portfolio.
Going forward, a main issue will be whether or not businesses will be able to
work through an economic downturn and resume capital expenditures in the
technology area without unemployment going that much higher. We feel any surge
in the jobless rate would dampen consumer spending both for those who have
lost their jobs as well as for those who fear losing them. Fortunately, the
fiscal and monetary policies that have characterized the first few months of
2001 have seemed to be geared toward increasing economic growth. The tax cut
that has been working its way through Congress could provide a substantial
stimulus to growth. In addition, the Fed has made it clear through both its
words and its actions that it stands ready to lend support to the economy. If
growth strengthens in the United States, we might add investments in European
bonds if trends in Europe indicate that growth is slowing from the peak levels
we saw during the period.
Respectfully,
/s/ Stephen C. Bryant /s/ Steven E. Nothern
Stephen C. Bryant Steven E. Nothern
Portfolio Manager Portfolio Manager
The opinions expressed in this report are those of MFS, and are current only
through the end of the period of the report as stated on the cover. These
views are subject to change at any time based on the market and other
conditions, and no forecasts can be guaranteed.
The portfolio is actively managed, and current holdings may be different. It
is not possible to invest directly in an index.
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PORTFOLIO MANAGERS' PROFILES
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STEPHEN C. BRYANT IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) (MFS(R)) AND PORTFOLIO MANAGER OF OUR GLOBAL FIXED-INCOME
INSTITUTIONAL PRODUCTS AND THE GLOBAL GOVERNMENTS PORTFOLIOS OF OUR
MUTUAL FUNDS AND VARIABLE ANNUITY PRODUCTS. HE ALSO MANAGES MFS(R)
GOVERNMENT MARKETS INCOME TRUST AND MFS(R) INTERMEDIATE INCOME TRUST,
TWO CLOSED-END FUNDS. HE JOINED MFS IN 1987 AS ASSISTANT VICE PRESIDENT.
HE WAS NAMED VICE PRESIDENT IN 1989, PORTFOLIO MANAGER IN 1992, AND
SENIOR VICE PRESIDENT IN 1993. STEVE IS A GRADUATE OF WESLEYAN
UNIVERSITY.
STEVEN E. NOTHERN, CFA, IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) (MFS(R)). HE IS PORTFOLIO MANAGER OF THE GOVERNMENT
SECURITIES PORTFOLIOS OF OUR MUTUAL FUNDS, VARIABLE ANNUITIES, AND
OFFSHORE FUNDS, AND ALSO MANAGES TWO CLOSED-END FUNDS, MFS(R)
INTERMEDIATE INCOME TRUST AND MFS(R) GOVERNMENT MARKETS INCOME TRUST.
STEVE JOINED MFS IN 1986 IN THE FIXED INCOME DEPARTMENT AND WAS NAMED
VICE PRESIDENT IN 1989, PORTFOLIO MANAGER IN 1991, AND SENIOR VICE
PRESIDENT IN 1993. HE IS A GRADUATE OF MIDDLEBURY COLLEGE AND HOLDS A
MASTER OF BUSINESS ADMINISTRATION DEGREE FROM BOSTON UNIVERSITY. HE
HOLDS THE CHARTERED FINANCIAL ANALYST (CFA) DESIGNATION AND IS A MEMBER
OF THE BOSTON SECURITY ANALYSTS SOCIETY, INC.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF
OVER 160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL,
SECURITY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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NUMBER OF SHAREHOLDERS
As of May 31, 2001, our records indicate that there are 7,232 registered
shareholders and approximately 24,400 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write
or call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
In accordance with Section 23(c) of the Investment Company Act of 1940, the
trust hereby gives notice that it may from time to time repurchase shares of
the trust in the open market at the option of the Board of Trustees and on
such terms as the Trustees shall determine.
OBJECTIVE: Seeks to provide a high level of current income
NEW YORK STOCK EXCHANGE SYMBOL: MGF
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PERFORMANCE SUMMARY
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(For the period ended May 31, 2001)
NET ASSET VALUE PER SHARE
November 30, 2000 $7.01
May 31, 2001 $7.07
NEW YORK STOCK EXCHANGE PRICE
November 30, 2000 $6.19
March 20, 2001 (high)* $6.80
December 4, 2000 (low)* $6.25
May 31, 2001 $6.46
*For the six months December 1, 2000, through May 31, 2001.
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RISK CONSIDERATIONS
Investments in foreign securities may be unfavorably affected by interest rate
and currency-exchange-rate changes as well as by market, economic, and
political conditions of the countries where investments are made. There may be
greater returns but also greater risk than with U.S. investments.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the managed portfolio.
These risks may increase share price volatility. See the prospectus for
details.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
MFS offers a Dividend Reinvestment and Cash Purchase Plan that allows you to
reinvest either all of the distributions paid by the trust or only the long-
term capital gains. Purchases are made at the market price unless that price
exceeds the net asset value (the shares are trading at a premium). If the
shares are trading at a premium, purchases will be made at a discounted price
of either the net asset value or 95% of the market price, whichever is
greater. Twice each year you can also buy shares. Investments from $100 to
$2,500 can be made in January and July on the 15th of the month or
shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee,
you can ask the firm or nominee to participate in the plan on your behalf.
If the nominee does not offer the plan, you may wish to request that your
shares be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have
available the name of the trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. Please call for additional details. When you
withdraw, you can receive the value of the reinvested shares in one of two ways:
a check for the value of the full and fractional shares, or a certificate for
the full shares and a check for the fractional shares.
PORTFOLIO OF INVESTMENTS (Unaudited) -- May 31, 2001
Bonds - 99.9%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 89.8%
Financial Services - 0.1%
Pemex Project Funding Master Trust, 8.5s, 2008## $ 600 $ 603,000
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Small Business Administration - 1.5%
SBA, 8.875s, 2011 $ 1,620 $ 1,726,491
SBA, 6.35s, 2021 2,625 2,540,449
SBA, 6.34s, 2021 2,000 1,932,700
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$ 6,199,640
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U.S. Government Agencies - 56.6%
Federal Home Loan Mortgage Corp., 5s, 2004 $ 4,000 $ 4,001,880
Federal Home Loan Mortgage Corp., 5.25s, 2006 46,562 46,169,017
Federal Home Loan Mortgage Corp., 7.5s, 2027 3,060 3,129,624
FHA (USGI 986 Spring Hill), 10.375s, 2030## 2,116 2,116,052
Financing Corp., 10.7s, 2017 8,500 12,136,385
Financing Corp., 9.8s, 2018 5,000 6,691,400
Financing Corp., 10.35s, 2018 9,500 13,285,180
FNMA, 4.75s, 2004 7,500 7,464,825
FNMA, 5.125s, 2004 5,000 5,025,800
FNMA, 6.956s, 2007 5,682 5,925,277
FNMA, 5.75s, 2010 2,500 2,160,185
FNMA, 7.5s, 2015 14,555 15,020,393
FNMA, 8.5s, 2027 10,100 10,822,756
FNMA, 7s, 2029 24,924 25,161,025
FNMA TBA, 6.5s, 2099 15,000 15,116,400
GNMA, 7s, 2022 15,020 15,283,515
GNMA, 7.5s, 2022 16,949 17,439,093
GNMA, 6.5s, 2028 17,541 17,431,232
GNMA, 8s, 2030 4,623 4,803,851
GNMA TBA, 7s, 2022 - 2025 894 906,235
Housing Urban Development, 6.59s, 2016 5,612 5,550,885
Private Export Funding Corp., 7.01s, 2004 3,380 3,502,525
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$239,143,535
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U.S. Treasury Obligations - 31.6%
U.S. Treasury Bonds, 10.375s, 2009 $ 14,600 $ 17,888,992
U.S. Treasury Bonds, 12s, 2013 5,000 6,932,050
U.S. Treasury Bonds, 9.875s, 2015 32,750 45,696,402
U.S. Treasury Bonds, 8.875s, 2017 6,000 7,880,640
U.S. Treasury Bonds, 3.625s, 2028 10,914 11,237,931
U.S. Treasury Bonds, 6.25s, 2030 3,000 3,167,340
U.S. Treasury Bonds, 5.375s, 2031 4,500 4,249,710
U.S. Treasury Notes, 5.875s, 2004 21,750 22,521,473
U.S. Treasury Notes, 4.25s, 2010 7,330 7,866,399
U.S. Treasury Notes, 6.5s, 2010 5,602 6,015,147
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$133,456,084
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Total U.S. Bonds $379,402,259
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Foreign Bonds - 10.1%
Argentina - 0.4%
Republic of Argentina, 0s, 2001 $ 1,635 $ 1,598,213
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Bulgaria - 0.3%
National Republic of Bulgaria, 6.313s, 2024 $ 1,879 $ 1,428,040
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Canada - 4.1%
Government of Canada, 6s, 2005 CAD 5,867 $ 3,864,245
Government of Canada, 5.25s, 2008 9,661 9,294,935
Government of Canada, 5.5s, 2009 6,344 4,028,748
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$ 17,187,928
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Chile - 0.3%
Compania Nacional de Transmission Electrica S.A.,
7.875s, 2011 (Electric - Integrated)## $ 1,250 $ 1,222,850
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Colombia - 0.1%
Republic of Columbia, 10.5s, 2006 $ 418 $ 418,418
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Greece - 1.3%
Hellenic Republic, 8.7s, 2005 EUR 164 $ 157,319
Hellenic Republic, 6s, 2006 5,869 5,155,513
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$ 5,312,832
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Mexico - 0.8%
Grupo Financiero BBVA Bancomer, S.A. de C.V., 10.5s,
2011 (Financial Services)## $ 872 $ 926,500
United Mexican States, 9.875s, 2007 800 866,800
United Mexican States, 8.375s, 2011 890 890,000
United Mexican States, 8.125s, 2019 880 819,482
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$ 3,502,782
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New Zealand - 0.4%
Government of New Zealand, 8s, 2006 NZD 3,999 $ 1,734,758
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Panama - 0.6%
Republic of Panama, 9.625s, 2011 $ 914 $ 934,565
Republic of Panama, 4.5s, 2014 100 86,589
Republic of Panama, 10.75s, 2020 1,310 1,365,675
Republic of Panama, 8.875s, 2027 390 350,025
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$ 2,736,854
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Qatar - 0.4%
State of Qatar, 9.75s, 2030## $ 1,490 $ 1,642,725
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Russia - 0.3%
Russian Federation, 8.75s, 2005## $ 1,502 $ 1,333,776
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South Korea - 0.2%
Hanvit Bank, 12.75s, 2010 (Banks and Credit Cos.)## 636 $ 683,700
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Spain - 0.9%
Kingdom of Spain, 7s, 2005 $ 3,600 $ 3,805,002
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United Kingdom
United Kingdom Treasury, 6.75s, 2004 GBP 5 $ 7,419
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Total Foreign Bonds $ 42,615,297
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Total Bonds (Identified Cost, $420,533,707) $422,017,556
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Rights
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SHARES
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United Mexican States (Identified Cost, $0)* 1,354,000 $ 18,279
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Warrants
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Republic of Venezuela (Identified Cost, $0)* 37,500 $ --
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Put Options Purchased
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PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
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Euro/August/0.95 $ 10,480 $ 2,348
Japanese Yen/August/125 2,764,155 35,934
Japanese Yen/August/125 1,718,938 82,509
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Total Put Options Purchased (Premiums Paid, $576,812) $ 120,791
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Short-Term Obligations - 7.4%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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Dow Chemical Co., due 6/01/01 $ 128 $ 128,000
Federal Farm Credit Bank Consolidated, due 6/15/01 -
6/19/01 26,100 26,052,906
Federal Home Loan Bank Consolidated, due 6/15/01 3,900 3,894,009
General Electric Capital Corp., due 6/01/01 209 209,000
JP Morgan Chase & Co., due 6/01/01 792 792,000
New Center Asset Trust, due 6/01/01 299 299,000
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Total Short-Term Obligations, at Amortized Cost $ 31,374,915
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Repurchase Agreement
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Merrill Lynch, dated 5/31/01, due 6/01/01, total to
be received $92,011 (secured by various U.S.
Goverment Securities in a jointly traded account),
at Cost $ 92 $ 92,000
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Total Investments (Identified Cost, $452,577,434) $453,623,541
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Put Options Written
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PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
-------------------------------------------------------------------------------------------------
Euro/August/0.8691 (Premiums Received, $189,639) $ (9,588) $ (359,400)
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Other Assets, Less Liabilities - (7.3)% (30,867,294)
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Net Assets - 100.0% $422,396,847
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* Non-income producing security.
## SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars JPY = Japanese Yen
CHF = Swiss Francs NOK = Norwegian Krone
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
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MAY 31, 2001
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Assets:
Investments, at value (identified cost, $452,577,434) $453,623,541
Foreign currency, at value (identified cost $1) 1
Investment of cash collateral for securities loaned,
(at identified cost and value) 86,584,480
Cash 866
Net receivable for forward foreign currency exchange
contracts to sell 1,103,656
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 334,385
Receivable for trust shares sold 6,000
Receivable for investments sold 4,326,661
Interest receivable 4,379,570
------------
Total assets $550,359,160
------------
Liabilities:
Payable for investments purchased $ 37,387,333
Collateral for securities loaned, at value 86,584,480
Payable to dividend disbursing agent 153,231
Net payable for forward foreign currency exchange
contracts to purchase 2,976,491
Written options outstanding, at value
(premium received, $189,639) 359,400
Payable to affiliates -
Management fee 7,881
Transfer and dividend disbursing agent fee 27,547
Administrative fee 203
Accrued expenses and other liabilities 465,747
------------
Total liabilities $127,962,313
------------
Net assets $422,396,847
============
Net assets consist of:
Paid-in capital $467,948,328
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (673,606)
Accumulated undistributed net realized loss on
investments and foreign currency transactions (45,034,776)
Accumulated undistributed net investment income 156,901
------------
Total $422,396,847
============
Shares of beneficial interest outstanding (97,911,555
shares authorized, less 38,160,600 treasury shares) 59,750,955
==========
Net asset value per share
(net assets / shares of beneficial interest outstanding) $7.07
=====
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
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SIX MONTHS ENDED MAY 31, 2001
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Net investment income:
Interest income $14,730,140
Dividends 15,087
-----------
Total investment income $14,745,227
Expenses -
Management fee $ 1,471,418
Trustees' compensation 70,703
Transfer and dividend disbursing agent fee 82,066
Administrative fee 30,895
Investor communication expense 70,411
Custodian fee 96,423
Postage 16,866
Auditing fees 18,074
Printing 22,605
Legal fees 821
Miscellaneous 61,127
-----------
Total expenses $ 1,941,409
Fees paid indirectly (39,773)
-----------
Net expenses $ 1,901,636
-----------
Net investment income $12,843,591
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 4,954,816
Written option transactions (193,685)
Foreign currency transactions (1,312,878)
-----------
Net realized gain on investments and foreign
currency transactions $ 3,448,253
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 882,599
Written options 75,569
Translation of assets and liabilities in
foreign currencies (194,441)
-----------
Net unrealized gain on investments and foreign
currency translation $ 763,727
-----------
Net realized and unrealized gain on investments
and foreign currency $ 4,211,980
-----------
Increase in net assets from operations $17,055,571
===========
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2001 NOVEMBER 30, 2000
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 12,843,591 $ 27,209,398
Net realized gain (loss) on investments and foreign
currency transactions 3,448,253 (14,346,045)
Net unrealized gain on investments and foreign currency
translation 763,727 17,939,494
------------- -------------
Increase in net assets from operations $ 17,055,571 $ 30,802,847
------------- -------------
Distributions declared to shareholders -
From net investment income $ (13,634,523) $ (18,111,821)
In excess of net investment income -- (12,251,962)
------------- -------------
Total distributions declared to shareholders $ (13,634,523) $ (30,363,783)
------------- -------------
Cost of shares reacquired $ (3,049,285) $ (25,591,692)
------------- -------------
Total increase (decrease) in net assets $ 371,763 $ (25,152,628)
Net assets:
At beginning of period 422,025,084 447,177,712
------------- -------------
At end of period (including accumulated undistributed
net investment income of $156,901 and $947,833,
respectively) $ 422,396,847 $ 422,025,084
============= =============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED -------------------------------------------------------------------------
MAY 31, 2001 2000 1999 1998 1997 1996
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.01 $ 6.94 $ 7.50 $ 7.41 $ 7.56 $ 7.62
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.21 $ 0.44 $ 0.43 $ 0.46 $ 0.49 $ 0.49
Net realized and unrealized
gain (loss) on investments
and foreign currency 0.07 0.06 (0.58) 0.08 (0.14) (0.07)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.28 $ 0.50 $(0.15) $ 0.54 $ 0.35 $ 0.42
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.23) $(0.29) $(0.40) $(0.46) $(0.49) $(0.49)
In excess of net investment
income -- -- -- (0.01) (0.03) (0.05)
From paid in capital -- (0.20) (0.06) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.23) $(0.49) $(0.46) $(0.47) $(0.52) $(0.54)
------ ------ ------ ------ ------ ------
Net increase from repurchase of
capital shares $ 0.01 $ 0.06 $ 0.05 $ 0.02 $ 0.02 $ 0.06
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.07 $ 7.01 $ 6.94 $ 7.50 $ 7.41 $ 7.56
------ ------ ------ ------ ------ ------
Per share market value - end of
period $ 6.46 $6.188 $5.813 $6.563 $6.688 $6.750
====== ====== ====== ====== ====== ======
Total return# 8.05%++ 15.24% (4.80)% 4.21% 6.91% 12.61%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.91%+ 0.94% 0.92% 0.89% 0.94% 1.00%
Net investment income 6.35%+ 6.35% 6.00% 6.14% 6.56% 6.63%
Portfolio turnover 28% 151% 102% 253% 248% 249%
Net assets at end of period
(000 Omitted) $422,397 $422,025 $447,178 $511,861 $524,580 $554,496
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Government Markets Income Trust (the trust) is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as a nondiversified, closed-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in foreign securities. Investments in foreign securities are
vulnerable to the effects of changes in the relative values of the local
currency and the U.S. dollar and to the effects of changes in each country's
legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, forward contracts,
and swap agreements, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data, without exclusive reliance upon exchange or over-the-counter
prices. Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the
foreign currency and translated into U.S. dollars at the closing daily
exchange rate. Options, and options on futures contracts listed on commodities
exchanges are reported at market value using closing settlement prices. Over-
the-counter options on securities are valued by brokers. Over-the-counter
currency options are valued through the use of a pricing model which takes
into account foreign currency exchange spot and forward rates, implied
volatility, and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued in good faith by the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Written Options - The trust, may write call or put options in exchange for a
premium. The premium is initially recorded as a liability, which is
subsequently adjusted to the current value of the option contract. When a
written option expires, the trust realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the trust. The trust, as writer of an
option, may have no control over whether the underlying securities may be sold
(call) or purchased (put) and, as a result, bears the market risk of an
unfavorable change in the price of the securities underlying the written
option. In general, written call options may serve as a partial hedge against
decreases in value in the underlying securities to the extent of the premium
received. Written options may also be used as part of an income producing
strategy reflecting the view of the trust's management on the direction of
interest rates.
Security Loans - State Street Bank and Trust Company ("State Street") and JP
Morgan Chase & Co. ("JP Morgan"), as lending agents, may loan the securities
of the trust to certain qualified institutions (the "Borrowers") approved by
the trust. The loans are collateralized at all times by cash or U.S. Treasury
securities in an amount at least equal to the market value of the securities
loaned. State Street provides the trust with indemnification against Borrower
default. The trust bears the risk of loss with respect to the investment of
cash collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust, and the lending agents. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust, and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
At May 31, 2001, the value of securities loaned was $84,867,956. These loans
were collateralized by cash of $86,584,480 which was invested in the following
short-term obligations:
PRINCIPAL AMORTIZED COST
AMOUNT AND VALUE
------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio $86,584,480 $86,584,480
-----------
Forward Foreign Currency Exchange Contracts - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The trust may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the trust may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The trust may also use contracts in a manner intended
to protect foreign currency-denominated securities from declines in value due
to unfavorable exchange rate movements. For non-hedging purposes, the trust
may enter into contracts with the intent of changing the relative exposure of
the trust's portfolio of securities to different currencies to take advantage
of anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All discount is
accreted for financial statement and tax reporting purposes as required by
federal income tax regulations.
The trust, will adopt the provisions of the AICPA Audit and Accounting Guide for
Investment Companies, as revised, effective for fiscal years beginning after
December 15, 2000. As required, the trust will begin amortizing premiums on debt
securities effective December 1, 2001. Prior to this date, the trust did not
amortize premiums on debt securities. The cumulative effect of this accounting
change will have no impact on the total net assets of the trust. The impact of
this accounting change has not been determined, but will result in a decrease to
cost of securities and a corresponding increase in net unrealized appreciation.
Fees Paid Indirectly - The trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the trust. This amount is shown as a reduction of total expenses on the
Statement of Operations.
Tax Matters and Distributions - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
At November 30, 2000, the trust, for federal income tax purposes, had a
capital loss carryforward of $48,087,867 which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on:
November 30, 2002 $21,490,437
November 30, 2004 196,662
November 30, 2005 8,818,381
November 30, 2007 11,594,208
November 30, 2008 5,988,179
(3) Transactions with Affiliates
Investment Adviser - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.32%
per annum of the trust's, average daily net assets and 5.33% of investment
income or 0.85% per annum of average daily net assets. The effective annual
rate for the six months ended May 31, 2001, was 0.69%.
The trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the trust, all of whom receive
remuneration for their services to the trust from MFS. Certain officers and
Trustees of the trust, are officers or directors of MFS, and MFS Service
Center, Inc. (MFSC). The trust has an unfunded defined benefit plan for all of
its independent Trustees. Included in Trustees' compensation is a net periodic
pension expense of $21,846 for the six months ended May 31, 2001.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the trust pays MFS an administrative fee
at the following annual percentages of the trust's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Transfer Agent - MFSC acts as registrar and dividend disbursing agent for the
trust. The agreement provides that the trust will pay MFSC an account
maintenance fee of no more than $9.00 and a dividend services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
--------------------------------------------------------------------------------
U.S. government securities $111,884,796 $95,908,346
------------ -----------
Investments (non-U.S. government securities) $ 17,849,329 $22,408,444
============ ===========
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $452,972,595
------------
Gross unrealized appreciation $ 7,877,348
Gross unrealized depreciation (7,226,402)
------------
Net unrealized appreciation $ 650,946
------------
(5) Shares of Beneficial Interest
The Trustees have authorized 97,911,555 full and fractional shares of
beneficial interest. Transactions in trust shares were as follows:
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2001 NOVEMBER 30, 2000
----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
Treasury shares reacquired 472,000 $3,049,285 4,231,200 $25,591,692
In accordance with the provisions of the trust's prospectus, 472,000 shares of
beneficial interest were purchased by the trust during the six months ended
May 31, 2001, at an average price per share of $6.46 and a weighted average
discount of 8.98% per share. The trust reacquired 4,231,200 shares of
beneficial interest during the year ended November 30, 2000, at an average
price per shares of $6.05 and a weighted average discount of 12.26% per share.
(6) Line of Credit
The trust and other affiliated funds participate in a $1.225 billion unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. In addition, a commitment fee, based on the average daily unused
portion of the line of credit, is allocated among the participating funds at
the end of each quarter. The commitment fee allocated to the trust for the six
months ended May 31, 2001, was $2,885. The trust had no borrowings during the
period.
(7) Financial Instruments
The trust, trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts, swap agreements, and futures contracts. The notional or
contractual amounts of these instruments represent the investment the trust
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the
risks associated with these instruments is meaningful only when all related
and offsetting transactions are considered.
Written Option Transactions
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------------------------------------------------------------
Outstanding, beginning of period 2 $ 264,232
Options written 2 412,462
Options terminated in closing transactions (3) (487,055)
-- ---------
Outstanding, end of period 1 $ 189,639
== =========
At May 31, 2001, the trust had sufficient cash and/or securities at least
equal to the value of the written options.
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
---------------------------------------------------------------------------------------------------------
Sales 06/13/01 AUD 27,410,007 $13,838,355 $13,885,507 $ (47,152)
06/13/01 EUR 16,653,751 14,890,730 14,077,147 813,583
06/13/01 JPY 445,877,256 3,751,754 3,755,995 (4,241)
06/13/01 NOK 136,189,282 14,845,467 14,502,181 343,286
06/13/01 NZD 9,255,810 3,772,737 3,774,557 (1,820)
----------- ----------- -----------
$51,099,043 $49,995,387 $ 1,103,656
=========== =========== ===========
Purchases 06/13/01 AUD 8,312,855 $ 8,543,760 $ 8,518,593 $ (25,167)
06/13/01 CHF 87,263 52,887 48,575 (4,312)
06/13/01 DKK 3,648,503 454,738 413,841 (40,897)
06/13/01 EUR 45,312,589 40,828,535 38,302,001 (2,526,534)
06/13/01 GBP 6,067,846 8,591,159 8,600,042 8,883
06/13/01 NOK 136,190,082 14,890,730 14,502,266 (388,464)
----------- ----------- -----------
$73,361,809 $70,385,318 $(2,976,491)
=========== =========== ===========
At May 31, 2001, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net payable of $4,973 with
Merrill Lynch and $502,133 with Union Bank of Switzerland and a net receivable
of $841,491 with Deutsche Bank.
At May 31, 2001, the trust had sufficient cash and/or securities to cover any
commitments under these contracts.
MFS(R) GOVERNMENT MARKETS INCOME TRUST
TRUSTEES PORTFOLIO MANAGERS
Marshall N. Cohan+(1) - Private Investor Stephen C. Bryant*
Steven E. Nothern*
Lawrence H. Cohn, M.D.+(2) - Chief of Cardiac
Surgery, Brigham and Women's Hospital; Professor TREASURER
of Surgery, Harvard Medical School James O. Yost*
The Hon. Sir J. David Gibbons, KBE+ (2) - Chief ASSISTANT TREASURERS
Executive Officer, Edmund Gibbons Ltd.; Chairman, Mark E. Bradley*
Colonial Insurance Company, Ltd. Robert R. Flaherty*
Laura F. Healy*
Abby M. O'Neill+(2) - Private Investor Ellen Moynihan*
Walter E. Robb, III+(1) - President and Treasurer, SECRETARY
Benchmark Advisors, Inc. (corporate financial Stephen E. Cavan*
consultants); President, Benchmark Consulting
Group, Inc. (office services) ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Arnold D. Scott* - Senior Executive Vice
President, Director, and Secretary, MFS Investment TRANSFER AGENT, REGISTRAR, AND
Management DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
Jeffrey L. Shames* - Chairman and Chief Executive c/o MFS Service Center, Inc.
Officer, MFS Investment Management P.O. Box 9024
Boston, MA 02205-9824
J. Dale Sherratt+(1) - President, Insight 1-800-637-2304
Resources, Inc. (acquisition planning specialist)
CUSTODIAN
Ward Smith+(1) - Former Chairman (until 1994), State Street Bank and Trust Company
NACCO Industries (holding company)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
+ Independent Trustee.
* MFS Investment Management.
(1) Member of Audit Committee
(2) Member of Portfolio Trading Committee
MFS(R) GOVERNMENT MARKETS ------------
INCOME TRUST PRSRT STD
U.S. POSTAGE
[logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
------------
500 Boylston Street
Boston, MA 02116- 3741
(C)2001 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116.
MGFCE-3 7/01 38.6M