2012 seen as year for bonds and gold

Volatile stock markets and the euro-zone sovereign debt crisis meant bonds and gold would be the wisest investments this year, Catherine Cheung Man-wah, head of investment strategy and research in Citibank's global consumer group, said yesterday.

Corporate bonds - except those issued by financial institutions - would outperform sovereign bonds, because of their higher returns and lower risk of default, she said.

The average spread for high-yield corporate bonds at the end of last month was 711 basis points, equivalent to an 8.5 per cent yield. This is much higher than the 1.88 per cent yield from 10-year US treasury bonds and the 2.89 per cent yield for 30-year US T-bonds.

Cheung predicted that yields on corporate bonds would fall as more investors bought them, easing to an average 7 per cent this year. She predicted that yields for 10-year T-bonds would rise to 2.45 per cent by the end of the year.

Gold would rebound to US$2,000 an ounce in the next six to 12 months as investors continued to use it as a hedge against macroeconomic risk, although its rise would be partly offset by short-term gains in the US dollar, Cheung said.

There was a 20 per cent to 25 per cent chance the European sovereign debt crisis would force some highly indebted member states to leave the euro zone, she said, and the euro would fall to US$1.25 this year from US$1.30.

The upside for the yuan and the Australian dollar would be capped by a slowdown in mainland export growth this year, Cheung said.

She predicted the yuan would rise by up to 1.5 per cent, compared with 5 per cent last year, and said the Australian dollar would be a buy when it fell below parity with the US dollar.