Treasuries lose appeal as portfolio hedge amid inflation pressures, Citi warns

US Treasuries are losing their appeal as a portfolio hedge, according to a report by Citigroup. The persistent inflation, increasing bond supply, and higher interest rates have weakened their traditional defensive role, prompting investors to explore alternatives like hedge funds and commodities. Citi's Mark Woodruff, CEO of Citigroup Australia, stated that the current economic environment has diminished the effectiveness of US government bonds in protecting against equity market volatility.

He noted that while 10-year Treasury yields near 5% would typically provide an attractive hedge, inflation and rising interest rates have complicated their role in portfolio construction. At the Citi Australia & New Zealand Investment Conference in Sydney, Woodruff highlighted the rising demand for hedging instruments, but warned that the effectiveness of traditional fixed income strategies has decreased.

The shift to alternatives reflects growing concerns over the correlation between equities and bonds, leading some investors to diversify into hedge funds, credit, and commodities to manage portfolio risk. In September, US 10-year Treasury yields hit their highest level since 2007, marking the beginning of a global bond selloff driven partly by surging energy costs and renewed inflation pressures.

Woodruff cautioned that escalating government bond issuance and structurally higher interest rates could further limit Treasuries' effectiveness as a defensive allocation, with central banks struggling to curb inflation expectations.