UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5078
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MFS GOVERNMENT MARKETS INCOME TRUST
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: November 30
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Date of reporting period: May 31, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds 5/31/06
SEMIANNUAL REPORT
MFS(R) GOVERNMENT MARKETS
INCOME TRUST
A path for pursuing opportunity
M F S(SM)
INVESTMENT MANAGEMENT(R)
[graphic omitted]
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NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS(R) GOVERNMENT MARKETS INCOME TRUST 5/31/06
The trust seeks to provide a high level of current income.
New York Stock Exchange Symbol: MGF
TABLE OF CONTENTS
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LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 2
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PORTFOLIO MANAGER PROFILE 3
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PERFORMANCE SUMMARY 4
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 6
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PORTFOLIO OF INVESTMENTS 7
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FINANCIAL STATEMENTS 13
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NOTES TO FINANCIAL STATEMENTS 17
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 24
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 25
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PROXY VOTING POLICIES AND INFORMATION 25
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QUARTERLY PORTFOLIO DISCLOSURE 25
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CONTACT INFORMATION BACK COVER
LETTER FROM THE CEO
[Photo of Robert J. Manning]
Dear Shareholders,
It has been said that change is the only constant in life. As investors have
seen, that theme is still accurate today as we recently have experienced
shifting economic cycles because of natural disasters and political
instability around the globe.
Markets worldwide have fluctuated in the past year as devastating hurricanes
had a dramatic effect on the international economy, particularly on oil
prices. We witnessed political unrest in the Middle East, highlighted by
instability in Iraq, and in Africa, the usually stable Nigeria also
experienced violence. As a result, energy prices have bounced up and down,
with crude oil prices at one point topping a record $70 per barrel.
Such cycles are not uncommon and in fact have almost become the norm in our
everyday lives. What does all of this mean to you as an investor? In times like
these, it helps to know that you're working with a seasoned investment
professional who has experience to guide you through difficult times. At
MFS(R), we believe our investment management team has the knowledge and
confidence to navigate through difficult cycles and at the same time see
through adversity to find investment opportunities for our clients and
shareholders.
Our investment management process, honed over 80 years, combines a unique
concept of teamwork with our unwavering focus on the long term. We firmly
believe that the best way to realize long-term financial goals - be it a
college education, a comfortable retirement, or a secure family legacy - is to
follow a three-pronged approach that focuses on longer time horizons. Allocate
holdings across the major asset classes - including stocks, bonds, and cash.
Diversify within each class to take advantage of different market segments and
investing styles. Rebalance assets regularly to maintain a desired asset
allocation. Of course, these strategies cannot guarantee a profit or protect
against a loss. This long-term approach requires diligence and patience, two
traits that in our experience are essential to capitalizing on the many
opportunities the financial markets can offer - through both up and down
economic cycles.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
July 17, 2006
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
PORTFOLIO COMPOSITION
PORTFOLIO STRUCTURE(i)
Bonds 96.3%
Cash & Other Net Assets 3.7%
FIXED INCOME SECTORS (i)
Mortgage-Backed Securities 49.5%
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U.S. Government Agencies 23.1%
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U.S. Treasury Securities 12.2%
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Non-U.S. Government Bonds 8.8%
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Emerging Market Bonds 2.2%
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Commercial Mortgage-Backed
Securities 0.5%
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CREDIT QUALITY OF BONDS (r)
AAA 96.6%
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BBB 1.6%
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BB 0.8%
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Not Rated 1.0%
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PORTFOLIO FACTS
Average Duration (d) 4.4
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Average Life (m) 7.0 yrs.
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Average Maturity (m) 14.5 yrs.
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Average Credit Quality of
Rated Securities (a) AAA
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Average Short Term Credit Quality A-1
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(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a fund with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre- refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based
on the rating assigned by Fitch, Inc. For those portfolios that hold a
security which is not rated by any of the three agencies, the security is
considered Not Rated. Holdings in U.S. Treasuries and government agency
mortgage-backed securities, if any, are included in a "AAA"-rating
category. Percentages are based on the total market value of investments as
of 5/31/06.
Percentages are based on net assets as of 5/31/06, unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
PORTFOLIO MANAGER PROFILE
Geoffrey L. Schechter, CFA, CPA, is Senior Vice President of MFS Investment
Management(R) (MFS(R)) and a portfolio manager of the firm's government
securities and municipal bond funds.
He joined MFS as Investment Officer in 1993 after working as a municipal
credit analyst with a major insurance company. He was named portfolio manager
in 1993, Assistant Vice President in 1994, and Vice President in 1995.
Geoff is a graduate of the University of Texas and has an M.B.A. degree from
Boston University. He holds the Chartered Financial Analyst (CFA) and
Certified Public Accountant (CPA) designations.
Note to Shareholders: Effective April 1, 2006, Geoffrey Schechter became
portfolio manager of the fund replacing Peter Vaream.
PERFORMANCE SUMMARY THROUGH 5/31/06
All results are historical. Investment return and principal value will
fluctuate, and shares, when sold, may be worth more or less than their
original cost. More recent returns may be more or less than those shown. Past
performance is no guarantee of future results.
PRICE SUMMARY
Six months ended
5/31/06
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Date Price
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Net asset value per share 5/31/06 $7.10
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11/30/05 $7.27
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New York Stock Exchange Price 5/31/06 $6.30
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1/11/06 (high) (t) $6.62
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4/13/06 (low) (t) $6.24
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11/30/05 $6.39
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TOTAL RETURNS VS BENCHMARKS
Six months ended
5/31/06
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New York Stock Exchange Price (r) 1.32%
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Net asset value (r) 0.37%
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Lehman Brothers U.S. Government/Mortgage Bond Index (f) 0.23%
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(f) Source: FactSet Research Systems, Inc.
(r) Includes reinvestment of dividends and capital gain distributions.
(t) For the period December 1, 2005 through May 31, 2006.
INDEX DEFINITION
Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued
by the U.S. Government as well as mortgage-backed pass-through securities of
Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The trust's shares may trade at a discount to net asset value. Shareholders do
not have the right to cause the trust to repurchase their shares at net asset
value. When trust shares trade at a premium, buyers pay more than the asset
value underlying trust shares, and shares purchased at a premium would receive
less than the amount paid for them in the event of the trust's liquidation. As
a result, the total returns that are calculated based on the net asset value
and New York Stock Exchange prices can be different.
The trust's monthly distributions may include a return of capital to
shareholders. Distributions that are treated for federal income tax purposes
as a return of capital will reduce each shareholder's basis in his or her
shares and, to the extent the return of capital exceeds such basis, will be
treated as gain to the shareholder from a sale of shares. Returns of
shareholder capital have the effect of reducing the trust's assets and may
increase the trust's expense ratio.
From time to time the trust may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
The portfolio's yield and share prices change daily based on the credit
quality of its investments and changes in interest rates. In general, the
value of debt securities will decline when interest rates rise and will
increase when interest rates fall. Debt securities with longer maturity dates
will be subject to greater price fluctuations than those with shorter
maturities. Mortgage securities are subject to prepayment risk which can offer
less potential for gains in a declining interest rate environment and greater
potential for loss in a rising interest rate environment. Derivatives involve
risks different from, and potentially greater than, those of the underlying
indicator's in whose value the derivative is based. The value of the
derivative can move in unexpected ways and result in unanticipated losses and
increased volatility if the value of the underlying indicator(s) does not move
in the direction or the extent anticipated. Interest payments on inflation
adjusted debt instruments can be unpredictable and vary based on the level of
inflation. The value of floating rate loans depends on the credit quality and
adequacy of the collateral securing the loan. Enforcing rights against the
collateral may be difficult or insufficient if the borrower of the floating
rate loan defaults. Foreign investments can be more volatile than U.S.
investments. Changes in currency exchange rates may affect the portfolio's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. Investing in emerging markets can involve
risks in addition to those generally associated with investing in more
developed foreign markets. When you sell your shares, they may be worth more
or less than the amount you paid for them.
These risks may increase share price volatility.
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.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The trust 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 may be made in
any amount over $100 in January and July on the 15th of the month or
shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee,
you can ask the firm or nominee to participate in the plan on your behalf. If
the nominee does not offer the plan, you may wish to request that your shares
be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please
have available the name of the trust and your account and Social Security
numbers. For certain types of registrations, such as corporate accounts,
instructions must be submitted in writing. Please call for additional details.
When you withdraw from the plan, you can receive the value of the reinvested
shares in one of two ways: a check for the value of the full and fractional
shares, or a certificate for the full shares and a check for the fractional
shares.
PORTFOLIO OF INVESTMENTS (unaudited) - 5/31/06
The Portfolio of Investments is a complete list of all securities owned by your trust.
It is categorized by broad-based asset classes.
Bonds - 97.6%
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ISSUER PAR AMOUNT VALUE ($)
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U.S. Bonds - 86.9%
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Agency - Other - 7.7%
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Financing Corp., 10.7%, 2017 $ 4,095,000 $ 5,852,087
Financing Corp., 9.4%, 2018 3,085,000 4,092,191
Financing Corp., 9.8%, 2018 4,350,000 5,933,944
Financing Corp., 10.35%, 2018 6,820,000 9,667,561
Financing Corp., STRIPS, 0%, 2017 5,000,000 2,658,715
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$ 28,204,498
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Asset Backed & Securitized - 0.5%
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Prudential Securities Secured Financing Corp., FRN,
7.4419%, 2013 (a) $ 1,819,000 $ 1,887,811
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Mortgage Backed - 49.3%
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Fannie Mae, 7.029%, 2007 $ 484,644 $ 488,674
Fannie Mae, 4.79%, 2012 3,522,804 3,362,532
Fannie Mae, 5%, 2013 - 2027 12,244,798 11,904,268
Fannie Mae, 5.37%, 2013 749,188 740,292
Fannie Mae, 4.8%, 2013 346,408 331,355
Fannie Mae, 4.543%, 2013 861,721 811,457
Fannie Mae, 4.845%, 2013 1,018,282 973,384
Fannie Mae, 5.06%, 2013 407,577 395,230
Fannie Mae, 4.65%, 2013 963,042 925,643
Fannie Mae, 4.45%, 2014 1,222,947 1,138,900
Fannie Mae, 4.772%, 2014 2,436,343 2,316,245
Fannie Mae, 4.6%, 2014 489,118 459,303
Fannie Mae, 4.667%, 2014 3,005,323 2,830,570
Fannie Mae, 4.519%, 2014 640,362 597,629
Fannie Mae, 4.77%, 2014 499,317 472,044
Fannie Mae, 4.848%, 2014 3,419,003 3,250,492
Fannie Mae, 5.1%, 2014 531,951 512,118
Fannie Mae, 4.62%, 2015 702,196 656,437
Fannie Mae, 4.82%, 2015 1,471,304 1,390,401
Fannie Mae, 4.69%, 2015 347,917 326,533
Fannie Mae, 4.85%, 2015 347,449 329,443
Fannie Mae, 4.56%, 2015 631,198 587,055
Fannie Mae, 4.665%, 2015 425,648 398,620
Fannie Mae, 4.7%, 2015 488,253 458,293
Fannie Mae, 4.89%, 2015 342,771 325,729
Fannie Mae, 4.74%, 2015 390,000 366,425
Fannie Mae, 4.925%, 2015 1,367,495 1,301,380
Fannie Mae, 4.87%, 2015 368,411 349,341
Fannie Mae, 4.815%, 2015 543,000 512,114
Fannie Mae, 5.48%, 2015 995,458 983,808
Fannie Mae, 5.423%, 2016 811,119 796,006
Fannie Mae, 6.5%, 2016 - 2036 10,184,177 10,308,936
Fannie Mae, 6%, 2017 - 2034 13,321,185 13,268,418
Fannie Mae, 5.5%, 2017 - 2034 68,690,244 66,499,628
Fannie Mae, 4.5%, 2019 15,966,581 15,139,578
Fannie Mae, 4.88%, 2020 369,481 358,164
Freddie Mac, 4.5%, 2013 - 2015 2,362,531 2,328,818
Freddie Mac, 4.375%, 2015 2,279,172 2,200,373
Freddie Mac, 5%, 2016 - 2025 10,922,294 10,785,575
Freddie Mac, 6%, 2021 - 2035 2,033,171 2,019,632
Freddie Mac, 5.5%, 2025 - 2035 11,077,305 10,705,219
Freddie Mac, 3.108%, 2035 795 792
Ginnie Mae, 5.5%, 2033 6,939,880 6,756,637
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$180,663,491
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U.S. Government Agencies - 15.0%
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Aid-Egypt, 4.45%, 2015 $ 1,755,000 $ 1,632,491
Aid-Israel, 0%, 2021 - 2024 7,830,000 2,962,686
Federal Home Loan Bank, 4.625%, 2008 9,515,000 9,407,975
Freddie Mac, 4.2%, 2007 4,358,000 4,287,871
Freddie Mac, 4.875%, 2009 3,129,000 3,094,349
Freddie Mac, 4.375%, 2015 4,495,000 4,154,616
Overseas Private Investment Corp., 0%, 2007 1,807,258 1,845,662
Small Business Administration, 8.875%, 2011 161,744 168,662
Small Business Administration, 6.35%, 2021 1,353,548 1,390,031
Small Business Administration, 6.34%, 2021 1,211,353 1,243,991
Small Business Administration, 6.44%, 2021 1,257,034 1,294,990
Small Business Administration, 6.625%, 2021 1,341,930 1,391,763
Small Business Administration, 4.98%, 2023 872,599 836,447
Small Business Administration, 4.72%, 2024 2,374,481 2,237,038
Small Business Administration, 4.34%, 2024 1,250,069 1,145,959
Small Business Administration, 4.77%, 2024 2,218,476 2,093,857
Small Business Administration, 5.52%, 2024 1,408,449 1,393,558
Small Business Administration, 4.86%, 2024 - 2025 2,720,501 2,575,771
Small Business Administration, 4.87%, 2024 1,514,501 1,435,669
Small Business Administration, 5.11%, 2025 1,335,319 1,282,902
Small Business Administration, 4.76%, 2025 2,191,119 2,050,594
U.S. Department of Housing & Urban Development, 6.36%, 2016 1,580,000 1,620,769
U.S. Department of Housing & Urban Development, 6.59%, 2016 5,612,000 5,670,898
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$ 55,218,549
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U.S. Treasury Obligations - 14.4%
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U.S. Treasury Bonds, 10.375%, 2012 $ 8,400,000 $ 9,019,828
U.S. Treasury Bonds, 12%, 2013 3,036,000 3,473,612
U.S. Treasury Bonds, 8.75%, 2017 6,100,000 7,879,962
U.S. Treasury Bonds, 4.5%, 2036 6,301,000 5,629,553
U.S. Treasury Notes, 6.5%, 2010 (f) 22,804,000 23,925,501
U.S. Treasury Notes, TIPS, 3.875%, 2009 2,674,904 2,794,228
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$ 52,722,684
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Total U.S. Bonds $318,697,033
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Foreign Bonds - 10.7%
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Austria - 0.5%
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Republic of Austria, 5.5%, 2007 EUR 1,362,000 $ 1,793,610
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Brazil - 0.0%
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Federative Republic of Brazil, 8%, 2018 $ 102,000 $ 106,335
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Cayman Islands - 0.0%
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Petroleum Export Peloil, 5.265%, 2011 (a) $ 98,304 $ 95,662
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Chile - 0.4%
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HQI Transelec Chile S.A., 7.875%, 2011 $ 314,000 $ 333,292
Republic of Chile, FRN, 5.5256%, 2008 1,057,000 1,060,700
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$ 1,393,992
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Finland - 0.8%
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Republic of Finland, 5.375%, 2013 EUR 2,227,000 $ 3,117,700
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France - 1.1%
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Republic of France, 4.75%, 2007 EUR 2,462,000 $ 3,204,683
Republic of France, 4.75%, 2012 EUR 251,000 338,446
Republic of France, 6%, 2025 EUR 207,000 326,740
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$ 3,869,869
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Germany - 1.5%
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Federal Republic of Germany, 3.5%, 2008 EUR 1,062,000 $ 1,360,885
Federal Republic of Germany, 3.75%, 2015 EUR 968,000 1,223,471
Federal Republic of Germany, 6.25%, 2030 EUR 199,000 328,593
KfW Bankengruppe, FRN, 2.563%, 2007 EUR 874,000 1,118,565
Landesbank Baden-Wurttemberg, FRN, 2.764%, 2007 EUR 290,000 371,315
Landesbank Baden-Wurttemberg, FRN, 2.879%, 2007 EUR 272,000 347,243
Landesbank Baden-Wurttemberg, FRN, 2.961%, 2007 EUR 510,000 653,116
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$ 5,403,188
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Ireland - 1.1%
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Republic of Ireland, 4.25%, 2007 EUR 2,387,000 $ 3,094,786
Republic of Ireland, 4.6%, 2016 EUR 648,000 872,107
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$ 3,966,893
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Malaysia - 0.1%
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Petronas Capital Ltd., 7.875%, 2022 $ 433,000 $ 499,064
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Mexico - 0.7%
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Pemex Project Funding Master Trust, 9.325%, 2008 $ 1,072,000 $ 1,152,400
United Mexican States, 8.125%, 2019 1,040,000 1,166,360
United Mexican States, 8.3%, 2031 128,000 145,280
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$ 2,464,040
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Netherlands - 0.9%
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Kingdom of Netherlands, 5.75%, 2007 EUR 1,169,000 $ 1,523,259
Kingdom of Netherlands, 3.75%, 2009 EUR 1,383,000 1,781,677
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$ 3,304,936
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New Zealand - 0.5%
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Government of New Zealand, 6.5%, 2013 NZD 2,478,000 $ 1,633,437
Government of New Zealand, 6%, 2017 NZD 519,000 335,858
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$ 1,969,295
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Panama - 0.2%
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Republic of Panama, 9.375%, 2029 $ 677,000 $ 825,940
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Russia - 0.4%
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Russian Federation, 3%, 2008 $ 1,474,000 $ 1,394,257
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South Africa - 0.3%
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Republic of South Africa, 9.125%, 2009 $ 855,000 $ 931,950
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Spain - 0.8%
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Kingdom of Spain, 6%, 2008 EUR 1,293,000 $ 1,723,753
Kingdom of Spain, 5.35%, 2011 EUR 771,000 1,061,998
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$ 2,785,751
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United Kingdom - 1.4%
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Network Rail MTN Finance PLC, FRN, 2.913%, 2007 EUR 876,000 $ 1,121,814
United Kingdom Treasury, 5.75%, 2009 GBP 794,000 1,533,371
United Kingdom Treasury, 5%, 2012 GBP 794,000 1,509,336
United Kingdom Treasury, 8%, 2015 GBP 410,000 963,726
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$ 5,128,247
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Total Foreign Bonds $ 39,050,729
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TOTAL BONDS (IDENTIFIED COST, $368,679,993) $357,747,762
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Portfolio of Investments (unaudited) - continued
Repurchase Agreement - 2.3%
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ISSUER PAR AMOUNT VALUE ($)
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Goldman Sachs, 5.02%, dated 5/31/06, due 6/01/06, total to be
received $8,414,173 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account), at Cost $ 8,413,000 $ 8,413,000
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TOTAL INVESTMENTS (IDENTIFIED COST, $377,092,993) (k) $366,160,762
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Other Assets, Less Liabilities - 0.1% 503,230
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NET ASSETS - 100.0% $366,663,992
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(a) Security exempt from registration under Rule 144A of the Securities Act of 1933. These
securities may be sold in transactions exempt from registration, normally to qualified
institutional buyers. At period end, the aggregate value of these securities was $1,983,473,
representing 0.5% of net assets.
(f) All or a portion of the security has been segregated as collateral for an open futures
contract.
(k) As of May 31, 2006, the trust held securities fair valued in accordance with the policies
adopted by the Board of Trustees, aggregating $357,747,762 and 97.70% of market value provided
by an independent pricing service using an evaluated bid.
The following abbreviations are used in the Portfolio of Investments and are defined:
FRN Floating Rate Note. The interest rate is the rate in effect as of period end.
STRIPS Separate Trading of Registered Interest and Principal of Securities
TIPS Treasury Inflation Protected Security
Abbreviations have been used throughout this report to indicate amounts shown in currencies other
than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of
abbreviations is shown below:
EUR Euro
GBP British Pound
NZD New Zealand Dollar
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Sales and Purchases in the table below are netted by currency.
NET UNREALIZED
CONTRACTS TO SETTLEMENT CONTRACTS APPRECIATION
DELIVER/RECEIVE DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
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SALES
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EUR 17,064,459 6/13/06 - 7/17/06 $20,817,347 $21,873,622 $(1,056,275)
GBP 4,932,029 6/05/06 - 8/02/06 8,900,832 9,220,452 (319,620)
NZD 4,203,695 6/06/06 2,551,192 2,667,054 (115,862)
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$32,269,371 $33,761,128 $(1,491,757)
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PURCHASES
EUR 778,000 6/07/06 $ 993,269 $996,810 $ 3,541
GBP 2,771,153 6/05/06 5,166,202 5,178,559 12,357
NZD 1,094,422 6/06/06 686,422 694,361 7,939
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$ 6,845,893 $6,869,730 $ 23,837
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At May 31, 2006, forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net payable of $149,270 with Merrill Lynch International.
FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2006:
UNREALIZED
EXPIRATION APPRECIATION/
DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION)
--------------------------------------------------------------------------------------------------
U.S. Treasury Bond (Short) 59 $6,266,906 Sep-06 $ 37,969
U.S. Treasury Note 5 yr (Short) 54 5,594,906 Sep-06 20,483
U.S. Treasury Note 10 yr (Long) 31 3,252,578 Sep-06 (15,850)
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$ 42,602
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At May 31, 2006, the trust had sufficient cash and/or securities to cover any commitments under
these derivative contracts.
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Assets and Liabilities (unaudited)
This statement represents your trust's balance sheet, which details the assets
and liabilities comprising the total value of the trust.
AT 5/31/06
ASSETS
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Investments, at value (identified cost, $377,092,993) $366,160,762
Cash 8,294
Receivable for forward foreign currency exchange contracts 50,035
Receivable for daily variation margin on open futures contracts 21,891
Interest receivable 3,698,404
Other assets 11,839
------------------------------------------------------------------------------------------------------
Total assets $369,951,225
------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------
Distributions payable $83,818
Payable for forward foreign currency exchange contracts 1,517,955
Payable for forward foreign currency exchange contracts subject
to master netting agreements 149,270
Payable for investments purchased 1,116,993
Payable for treasury shares reacquired 65,371
Payable to affiliates
Management fee 25,065
Transfer agent and dividend disbursing costs 14,789
Administrative services fee 195
Payable for independent trustees' compensation 190,968
Accrued expenses and other liabilities 122,809
------------------------------------------------------------------------------------------------------
Total liabilities $3,287,233
------------------------------------------------------------------------------------------------------
Net assets $366,663,992
------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
------------------------------------------------------------------------------------------------------
Paid-in capital $403,680,265
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies (12,468,065)
Accumulated net realized gain (loss) on investments and foreign
currency transactions (25,553,835)
Undistributed net investment income 1,005,627
------------------------------------------------------------------------------------------------------
Net assets $366,663,992
------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding (56,770,386 issued,
less 5,104,331 treasury shares) 51,666,055
------------------------------------------------------------------------------------------------------
Net asset value per share (net assets of $366,663,992/
51,666,055 shares of beneficial interest outstanding) $7.10
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Operations (unaudited)
This statement describes how much your trust earned in investment income and
accrued in expenses. It also describes any gains and/or losses generated by
trust operations.
SIX MONTHS ENDED 5/31/06
NET INVESTMENT INCOME
-------------------------------------------------------------------------------------------------------
Interest income $9,403,513
-------------------------------------------------------------------------------------------------------
Expenses
Management fee $1,157,655
Transfer agent and dividend disbursing costs 75,237
Administrative services fee 28,442
Independent trustees' compensation 38,182
Custodian fee 90,634
Shareholder communications 29,727
Auditing fees 34,332
Legal fees 3,840
Miscellaneous 96,160
-------------------------------------------------------------------------------------------------------
Total expenses $1,554,209
-------------------------------------------------------------------------------------------------------
Fees paid indirectly (21,594)
Reduction of expenses by investment adviser (1,295)
-------------------------------------------------------------------------------------------------------
Net expenses $1,531,320
-------------------------------------------------------------------------------------------------------
Net investment income $7,872,193
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
-------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis)
Investment transactions $(503,281)
Futures contracts 323,291
Foreign currency transactions 49,182
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $(130,808)
-------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $(6,395,579)
Futures contracts 57,954
Translation of assets and liabilities in foreign currencies (1,382,024)
-------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(7,719,649)
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $(7,850,457)
-------------------------------------------------------------------------------------------------------
Change in net assets from operations $21,736
-------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statements of Changes in Net Assets
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
SIX MONTHS ENDED YEAR ENDED
5/31/06 11/30/05
(UNAUDITED)
CHANGE IN NET ASSETS
------------------------------------------------------------------------------------------------------
FROM OPERATIONS
------------------------------------------------------------------------------------------------------
Net investment income $7,872,193 $16,419,190
Net realized gain (loss) on investments and foreign
currency transactions (130,808) 4,745,235
Net unrealized gain (loss) on investments and foreign
currency translation (7,719,649) (14,151,436)
------------------------------------------------------------------------------------------------------
Change in net assets from operations $21,736 $7,012,989
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------
From net investment income $(9,190,076) $(16,936,571)
------------------------------------------------------------------------------------------------------
TRUST SHARE (PRINCIPAL) TRANSACTIONS
------------------------------------------------------------------------------------------------------
Cost of shares reacquired $(2,881,555) $(10,423,312)
------------------------------------------------------------------------------------------------------
Total change in net assets $(12,049,895) $(20,346,894)
------------------------------------------------------------------------------------------------------
NET ASSETS
------------------------------------------------------------------------------------------------------
At beginning of period 378,713,887 399,060,781
At end of period (including undistributed net investment
income of $1,005,627 and $2,323,510, respectively) $366,663,992 $378,713,887
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Financial Highlights
The financial highlights table is intended to help you understand the trust's financial performance for the semiannual
period and the past 5 fiscal years. Certain information reflects financial results for a single trust share. The total
returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the trust share
class (assuming reinvestment of all distributions) held for the entire period.
SIX MONTHS YEARS ENDED 11/30
ENDED ----------------------------------------------------------------------
5/31/06 2005 2004 2003 2002 2001
(UNAUDITED)
Net asset value, beginning of period $7.27 $7.43 $7.44 $7.49 $7.32 $7.01
-------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS (x)
-------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.15 $0.31 $0.31 $0.26 $0.37 $0.42
Net realized and unrealized
gain (loss) on investments and
foreign currency (0.15) (0.17) (0.02) 0.02 0.20 0.31
-------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $-- $0.14 $0.29 $0.28 $0.57 $0.73
-------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
-------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.18) $(0.32) $(0.33) $(0.36) $(0.42) $(0.43)
-------------------------------------------------------------------------------------------------------------------------------
Net increase from repurchase of
capital shares $0.01 $0.02 $0.03 $0.03 $0.02 $0.01
-------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.10 $7.27 $7.43 $7.44 $7.49 $7.32
-------------------------------------------------------------------------------------------------------------------------------
Per share market value, end of period $6.30 $6.39 $6.55 $6.71 $6.77 $6.59
-------------------------------------------------------------------------------------------------------------------------------
Total return at market value (%)
(r)(s) 1.32(n) 2.36 2.49 4.38 9.31 13.56
-------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA:
-------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 0.83(a) 0.83 0.81 0.79 0.87 0.90
Expenses after expense reductions (f) 0.83(a) 0.83 0.81 0.79 0.87 0.90
Net investment income (x) 4.22(a) 4.20 4.12 3.41 4.98 5.82
Portfolio turnover 14 68 71 108 123 105
Net assets at end of period
(000 Omitted) $366,664 $378,714 $399,061 $414,095 $433,624 $436,173
-------------------------------------------------------------------------------------------------------------------------------
(a) Annualized.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower.
(x) Effective December 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies and began amortizing and accreting all premiums and discounts on debt securities. Per share data and ratios
for periods prior to November 30, 2002 have not been restated to reflect this change.
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 amended, as a closed-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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, including securities of emerging
market issuers. 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. The markets of emerging markets countries are generally
more volatile than the markets of developed countries with more mature
economies. All of the risks of investing in foreign securities previously
described are heightened when investing in emerging markets countries.
INVESTMENT VALUATIONS - Debt instruments (other than short-term instruments),
including restricted debt instruments, are generally valued at an evaluated or
composite bid as reported by an independent pricing service. Values of debt
instruments obtained from pricing services can utilize both dealer-supplied
valuations and electronic data processing techniques, which take into account
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. Short-term instruments with a maturity at issuance of
397 days or less are generally valued at amortized cost, which approximates
market value. Futures contracts are generally valued at last posted settlement
price as reported by an independent pricing service on the market on which
they are primarily traded. Futures contracts for which there were no trades
that day for a particular position are generally valued at the closing bid
quotation as reported by an independent pricing service on the market on which
they are primarily traded. Forward foreign currency contracts are generally
valued at the mean of bid and asked prices for the time period interpolated
from rates reported by an independent pricing service for proximate time
periods. Securities and other assets generally valued on the basis of
information from an independent pricing service may also be valued at a
broker-dealer bid quotation. The values of foreign securities and other assets
and liabilities expressed in foreign currencies are converted to U.S. dollars
using the mean of bid and asked prices for rates reported by an independent
pricing service. The Board of Trustees has delegated primary responsibility
for determining or causing to be determined the value of the trust's
investments (including any fair valuation) to the adviser pursuant to
valuation policies and procedures approved by the Board. If the adviser
determines that reliable market quotations are not readily available,
investments are valued at fair value as determined in good faith by the
adviser in accordance with such procedures under the oversight of the Board of
Trustees. Under the trust's valuation policies and procedures, market
quotations are not considered to be readily available for many types of debt
instruments. These investments are generally valued at fair value based on
information from independent pricing services. The adviser may rely on
independent pricing services or other information (such as the correlation
with price movements of similar securities in the same or other markets; the
type, cost and investment characteristics of the security; the business and
financial condition of the issuer; and trading and other market data) to
assist in determining whether to fair value and at what value to fair value an
investment. The value of an investment for purposes of calculating the trust's
net asset value can differ depending on the source and method used to
determine value. When fair valuation is used, the value of investments used to
determine the trust's net asset value may differ from quoted or published
prices for the same investments.
REPURCHASE AGREEMENTS - The trust may enter into repurchase agreements with
institutions that the trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The trust
requires that the securities collateral in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the trust to
obtain those securities in the event of a default under the repurchase
agreement. The trust monitors, on a daily basis, the value of the collateral
to ensure that its value, including accrued interest, is greater than amounts
owed to the trust under each such repurchase agreement. The trust, along with
other affiliated entities of Massachusetts Financial Services Company (MFS),
may utilize a joint trading account for the purpose of entering into one or
more repurchase agreements.
INFLATION-ADJUSTED DEBT SECURITIES - The trust invests in inflation-adjusted
debt securities issued by the U.S. Treasury. The trust may also invest in
inflation-adjusted debt securities issued by U.S. Government agencies and
instrumentalities other than the U.S. Treasury and by other entities such as
U.S. and foreign corporations and foreign governments. The principal value of
these debt securities is adjusted by references to changes in the Consumer
Price Index or another general price or wage index. These debt securities
typically pay a fixed rate of interest, but this fixed rate is applied to the
inflation-adjusted principal amount. The principal paid at maturity of the debt
security is typically equal to the inflation-adjusted principal amount, or the
security's original par value, whichever is greater. Other types of
inflation-adjusted securities may use other methods to adjust for other
measures of inflation.
FOREIGN CURRENCY TRANSLATION - 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.
DERIVATIVE RISK - The trust may invest in derivatives for hedging or non-
hedging purposes. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains. When the trust uses derivatives as an investment to
gain market exposure, or for hedging purposes, gains and losses from
derivative instruments may be substantially greater than the derivative's
original cost. Derivative instruments include forward foreign currency
exchange contracts and futures contracts.
FUTURES CONTRACTS - The trust may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the trust is
required to deposit with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the trust each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes
as unrealized gains or losses by the trust. Upon entering into such contracts,
the trust bears the risk of interest or exchange rates or securities prices
moving unexpectedly, in which case, the trust may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
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 the contract. The trust may enter into forward foreign currency
exchange 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 premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations.
The trust may receive proceeds from litigation settlements involving its
portfolio holdings. Any proceeds received are reflected in realized gain/loss
in the Statement of Operations, or in unrealized gain/loss if the security is
still held by the trust.
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, for the six months ended May 31, 2006, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The trust intends to continue to qualify as a
regulated investment company, as defined under Subchapter M of the Internal
Revenue Code, and to distribute all of its taxable income, including realized
capital gains. Accordingly, no provision for federal income tax is required in
the financial statements. Foreign taxes, if any, have been accrued by the
trust in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations, which may differ from generally accepted accounting principles.
Certain capital accounts in the financial statements are periodically adjusted
for permanent differences in order to reflect their tax character. These
adjustments have no impact on net assets or net asset value per share.
Temporary differences which arise from recognizing certain items of income,
expense, gain or loss in different periods for financial statement and tax
purposes will reverse at some time in the future. Distributions in excess of
net investment income or net realized gains are temporary overdistributions
for financial statement purposes resulting from differences in the recognition
or classification of income or distributions for financial statement and
tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt
securities, wash sale loss deferrals, straddle loss deferrals, foreign
currency transactions, and derivative transactions.
The tax character of distributions made during the current period will be
determined at fiscal year end. The tax character of distributions declared to
shareholders is as follows:
NOVEMBER 30, 2005 NOVEMBER 30, 2004
Ordinary income (including any
short-term capital gains) $16,936,571 $17,946,379
The federal tax cost and the tax basis components of distributable earnings
were as follows:
AS OF MAY 31, 2006
Cost of investments $382,079,279
----------------------------------------------------------
Gross appreciation $1,508,879
Gross depreciation (17,427,396)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $(15,918,517)
AS OF NOVEMBER 30, 2005
Undistributed ordinary income 2,880,349
Capital loss carryforwards (21,219,412)
Net unrealized appreciation (depreciation) (8,755,619)
Other temporary differences (753,251)
The aggregate cost above includes prior fiscal year end tax adjustments.
As of November 30, 2005, the trust had available capital loss carryforwards to
offset future realized gains. Such losses expire as follows:
November 30, 2007 $(11,594,208)
November 30, 2008 (5,988,179)
November 30, 2012 (3,637,025)
--------------------------------------------------
$(21,219,412)
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with 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% of the trust's average daily net assets and
5.33% of gross investment income. MFS has agreed to temporarily reduce its
management fee to the lesser of the contractual management fee as set forth
above or 0.85% of the average daily net assets. The management fee, from net
assets and gross investment income, incurred for the six months ended
May 31, 2006 was equivalent to an annual effective rate of 0.62% of the
trust's average daily net assets.
TRANSFER AGENT - The trust pays a portion of transfer agent and dividend-
disbursing costs to MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary
of MFS. MFSC receives a fee from the trust, for its services as registrar and
dividend-disbursing agent. 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. For the six months ended
May 31, 2006, these fees amounted to $48,640. MFSC also receives payment from
the trust for out-of-pocket expenses paid by MFSC on behalf of the trust. For
the six months ended May 31, 2006, these costs amounted to $22,847.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement, the funds may partially reimburse MFS the costs incurred to provide
these services, subject to review and approval by the Board of Trustees. Each
fund is charged a fixed amount plus a fee based on calendar year average net
assets. From July 1, 2005 through March 31, 2006, the trust's annual fixed
amount was $10,000. Effective April 1, 2006, the trust's annual fixed amount
is $17,500.
The administrative services fee incurred for the six months ended May 31, 2006
was equivalent to an annual effective rate of 0.0152% of the trust's average
daily net assets.
TRUSTEES' AND OFFICERS' COMPENSATION - The trust pays compensation to
Independent Trustees in the form of a retainer, attendance fees, and
additional compensation to Board and Committee chairpersons. The trust does
not pay compensation directly to Trustees or to officers of the trust who are
also officers of the investment adviser, 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 MFSC. The trust has an unfunded,
defined benefit plan for certain retired Independent Trustees which resulted
in a pension expense of $7,396. The trust also has an unfunded retirement
benefit deferral plan for certain Independent Trustees which resulted in an
expense of $380. Both amounts are included in Independent trustees'
compensation for the six months ended May 31, 2006. The deferred liability for
retirement benefits payable to certain Trustees under both plans amounted to
$170,593 at May 31, 2006, and is included in payable for independent trustees'
compensation.
DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan)
Independent Trustees previously were allowed to elect to defer receipt of all
or a portion of their annual compensation. Trustees are no longer allowed to
defer compensation under the Plan. Amounts previously deferred are treated as
though equivalent dollar amounts had been invested in shares of the trust or
other MFS funds selected by the Trustee. Deferred amounts represent an
unsecured obligation of the trust until distributed in accordance with the
Plan. Included in other assets and payable for independent trustees'
compensation is $11,839 of Deferred Trustees' Compensation.
OTHER - This trust and certain other MFS funds (the funds) have entered into a
services agreement (the Agreement) which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement. For the six months ended May 31, 2006, the fee paid to Tarantino
LLC was $1,513. MFS has agreed to reimburse the trust for a portion of the
payments made by the funds to Tarantino LLC in the amount of $1,295, which is
shown as a reduction of total expenses in the Statement of Operations.
Additionally, MFS has agreed to bear all expenses associated with office
space, other administrative support, and supplies provided to the ICCO.
(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 $35,396,923 $36,154,919
-----------------------------------------------------------------------------
Investments (non-U.S. government securities) $14,015,560 $18,604,988
-----------------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized the repurchase by the trust of up to 10% annually of its own shares
of beneficial interest. The trust repurchased and retired 449,100 shares of
beneficial interest during the six months ended May 31, 2006 at an average
price per share of $6.42 and a weighted average discount of 10.79% per share.
The trust repurchased and retired 1,578,900 shares of beneficial interest
during the year ended November 30, 2005 at an average price per share of $6.60
and a weighted average discount of 10.85% per share. Transactions in trust
shares were as follows:
PERIOD ENDED YEAR ENDED
MAY 31, 2006 NOVEMBER 30, 2005
SHARES AMOUNT SHARES AMOUNT
Treasury shares
reacquired (449,100) $ (2,881,555) (1,578,900) $ (10,423,312)
(6) LINE OF CREDIT
The trust and other affiliated funds participate in a $1 billion unsecured
committed line of credit provided by a syndication of banks under a credit
agreement. In addition, the trust and other affiliated funds have established
uncommitted borrowing arrangements with certain banks. Borrowings may be made
for temporary financing needs. Interest is charged to each fund, based on its
borrowings, at a rate equal to the Federal Reserve funds rate plus 0.35%. In
addition, a commitment fee, based on the average daily, unused portion of the
committed line of credit, is allocated among the participating funds at the
end of each calendar quarter. The commitment fee allocated to the trust for
the six months ended May 31, 2006 was $1,909 and is included in miscellaneous
expense on the Statement of Operations. The trust had no significant
borrowings during the six months ended May 31, 2006.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of MFS Government Markets Income Trust:
We have reviewed the accompanying statement of assets and liabilities of MFS
Government Markets Income Trust (the "Trust"), including the portfolio of
investments, as of May 31, 2006, and the related statement of operations,
changes in net assets, and financial highlights for the six-month period ended
May 31, 2006. These interim financial statements and financial highlights are
the responsibility of the Trust's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim financial statements and financial
highlights referred to above for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the statement of changes
in net assets for the year ended November 30, 2005, and financial highlights
for each of the five years in the period ended November 30, 2005, and in our
report dated January 23, 2006, we expressed an unqualified opinion on such
statement of changes in net assets and financial highlights.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 24, 2006
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
A discussion regarding the Board's most recent review and renewal of the
Fund's investment advisory agreement is available by clicking on the fund's
name under "Select a fund" on the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the Proxy Voting section of mfs.com or by visiting the SEC's Web site at
http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The trust will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The trust's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-551-5850. The trust's Form N-Q is available on
the EDGAR database on the Commission's Internet Web site at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
INVESTOR INFORMATION
Transfer Agent, Registrar and Dividend Disbursing Agent
Call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern
time
Write to: MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
NUMBER OF SHAREHOLDERS
As of May 31, 2006, our records indicate that there are 4,757 registered
shareholders and approximately 18,613 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:
MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
1-800-637-2304
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2006 MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116.
MGF-SEM-7/06 29M
ITEM 2. CODE OF ETHICS.
The Registrant has not amended any provision in its Code of Ethics (the "Code")
that relates to any element of the Code's definition enumerated in paragraph
(b) of Item 2 of this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable for semi-annual reports.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments for each series of the Registrant is included as part
of the report to shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable for semi-annual reports.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
GENERAL. Information regarding the portfolio managers of the MFS Government
Markets Income Trust (the "Fund") provided as of May 31, 2006 is set forth
below.
TITLE AND FIVE YEAR
PORTFOLIO MANAGER PRIMARY ROLE SINCE HISTORY
----------------- ------------ ----- --------------------
Geoffrey L. Schechter Portfolio Manager April Senior Vice President of
2006 MFS; employed in the
investment management
area of MFS since 1993.
COMPENSATION. Portfolio manager total cash compensation as of May 31, 2006 is a
combination of base salary and performance bonus:
o Base Salary - Base salary represents a relatively smaller percentage of
portfolio manager total cash compensation (generally below 33%) than
incentive compensation.
o Performance Bonus - Generally, incentive compensation represents a
majority of portfolio manager total cash compensation. The performance
bonus is based on a combination of quantitative and qualitative factors,
with more weight given to the former (generally over 60%) and less weight
given to the latter.
=> The quantitative portion is based on pre-tax performance of all of
the accounts managed by the portfolio manager (which includes the
Fund and any other accounts managed by the portfolio manager) over a
one-, three- and five-year period relative to the appropriate Lipper
peer group universe and/or one or more benchmark indices with respect
to each account. The primary weight is given to portfolio performance
over a three-year time period with lesser consideration given to
portfolio performance over one- and five-year periods (adjusted as
appropriate if the portfolio manager has served for shorter periods).
=> The qualitative portion is based on the results of an annual
internal peer review process (conducted by other portfolio managers,
analysts and traders) and management's assessment of overall
portfolio manager contributions to the investment process (distinct
from portfolio performance).
Portfolio managers also typically benefit from the opportunity to participate
in the MFS Equity Plan. Equity interests in MFS or its parent company are
awarded by management, on a discretionary basis, taking into account tenure at
MFS, contribution to the investment process and other factors.
Finally, portfolio managers are provided with a benefits package including a
defined contribution plan, health coverage and other insurance, which are
available to other employees of MFS on substantially similar terms. The
percentage of compensation provided by these benefits depends upon the length
of the individual's tenure at MFS and salary level as well as other factors.
OWNERSHIP OF FUND SHARES. The following table shows the dollar range of equity
securities of the Fund beneficially owned by the Fund's portfolio manager as of
the Fund's semi-annual period ended May 31, 2006. The following dollar ranges
apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
NAME OF PORTFOLIO MANAGER DOLLAR RANGE OF EQUITY SECURITIES IN FUND
------------------------- -----------------------------------------
Geoffrey L. Schechter N
OTHER ACCOUNTS. In addition to the Fund, the Fund's portfolio manager is
responsible (either individually or jointly) for the day-to-day management of
certain other accounts, the number and total assets of which as of the Fund's
semi-annual period ended May 31, 2006 were as follows:
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
-------------------- ------------------------ --------------
NUMBER OF NUMBER OF NUMBER OF
NAME ACCOUNTS* TOTAL ASSETS* ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
Geoffrey L. Schechter 10 $6 billion 1 $224 million 2 $198 million
--------------
* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified
in the table above.
POTENTIAL CONFLICTS OF INTEREST. MFS seek to identify potential conflicts of
interest resulting from a portfolio manager's management of both the Fund and
other accounts and has adopted policies and procedures designed to address such
potential conflicts.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for accounts with similar investment objectives of the
Adviser or subsidiary of the Adviser. Securities transactions for the Fund and
other accounts with similar investment objectives are generally executed on the
same day, or the next day. Nevertheless, it may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by MFS to be fair and equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In most cases, however, MFS believes
that the Fund's ability to participate in volume transactions will produce
better executions for the Fund.
MFS does not receive a performance fee for its management of the Fund. MFS
and/or a portfolio manager may have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
accounts other than the Fund--for instance, those that pay a higher advisory
fee and/or have a performance fee.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
=============================================================================================================
MFS GOVERNMENT MARKETS INCOME TRUST
-------------------------------------------------------------------------------------------------------------
(D)
(C) MAXIMUM NUMBER
TOTAL NUMBER OF (OR APPROXIMATE
(B) SHARES PURCHASED AS DOLLAR VALUE) OF
(A) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET
TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR BE PURCHASED UNDER
PERIOD SHARES PURCHASED PER SHARE PROGRAMS THE PLANS OR PROGRAMS
-------------------------------------------------------------------------------------------------------------
12/1/05 - 12/31/05 98,500 $6.44 98,500 4,074,776
-------------------------------------------------------------------------------------------------------------
1/1/06 - 1/31/06 60,600 $6.59 60,600 4,014,176
-------------------------------------------------------------------------------------------------------------
2/1/06 - 2/28/06 41,300 $6.49 41,300 3,972,876
-------------------------------------------------------------------------------------------------------------
3/1/06 - 3/31/06 82,600 $6.42 82,600 5,108,876
-------------------------------------------------------------------------------------------------------------
4/1/06 - 4/30/06 84,000 $6.31 84,000 5,024,876
-------------------------------------------------------------------------------------------------------------
5/1/06 - 5/31/06 82,100 $6.33 82,100 4,942,776
-------------------------------------------------------------------------------------------------------------
TOTAL 499,100 $6.42 499,100
-------------------------------------------------------------------------------------------------------------
Note: The Board of Trustees approves procedures to repurchase Fund shares
annually. The notification to shareholders of the program is included in the
semi-annual and annual reports sent to shareholders. These annual programs
begin on March 1st of each year. The programs conform to the conditions of Rule
10b-18 of the securities Exchange Act of 1934 and limit the aggregate number of
Fund shares that may be repurchased in each annual period (March 1 through the
following February 28) to 10% of the Registrant's outstanding shares as of the
first day of the plan year (March 1). The aggregate number of Fund shares
available for repurchase for the March 1, 2006 plan year are 5,191,476.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the effectiveness of the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940 (the "Act")) as conducted within 90 days of
the filing date of this Form N-CSR, the registrant's principal financial
officer and principal executive officer have concluded that those
disclosure controls and procedures provide reasonable assurance that the
material information required to be disclosed by the registrant on this
report is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter of the period covered by the report that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
NOTICE
A copy of the Amended and Restated Declaration of Trust of the Registrant is on
file with the Secretary of State of the Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the
Registrant by an officer of the Registrant as an officer and not individually
and the obligations of or arising out of this instrument are not binding upon
any of the Trustees or shareholders individually, but are binding only upon the
assets and property of the respective constituent series of the Registrant.
SIGNATURES
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.
(Registrant) MFS GOVERNMENT MARKETS INCOME TRUST
------------------------------------------------------------------
By (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President
Date: July 21, 2006
-------------
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 (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President (Principal Executive
Officer)
Date: July 21, 2006
-------------
By (Signature and Title)* TRACY ATKINSON
-----------------------------------------------------
Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: July 21, 2006
-------------
* Print name and title of each signing officer under his or her signature.