12/30/96 'CASH AND VERY LIQUID BONDS CAN PUT YOU ON THE OFFENSIVE'

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'CASH AND VERY LIQUID BONDS CAN PUT YOU ON THE OFFENSIVE'

Randall Merk, director of fixed-income for American Century Investments, says investors may need to rebalance portfolios.
ON THE MARKETS: ''It's foolish to underestimate the creative powers this country has unleashed...Much of that news, however, is already factored into stocks and bonds. I don't think things will reverse, but it's prudent and cheaper than ever to go up in credit quality and liquidity than it has been for a long time.''
ON PORTFOLIO TUNE-UPS: ''Now is a good time to take profits on the margin, and with some marginal cash that comes in, look at what bond sectors have trailed.''
ON CASH: ''Cash and very liquid bonds can put you on the offensive. You've got to have some ammunition if you're going to buy on dips.''
ON INVESTMENT STRATEGY: ''For higher tax brackets and especially for people in California, New York, New Jersey, and Massachusetts, you can easily get tax-equivalent yields of 7% to 9% on municipal bonds. At the other extreme, investors may want to look at what has underperformed--higher-quality corporates, Treasury notes, and Ginnie Mae mortgage-backeds.''
ON OTHER IDEAS: ''I like German government bonds. The German economy is not overheating, and the rates are attractive. The dollar has adjusted so much that European government bonds make some sense. These bonds have room to move.''

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