As supply rises, inflation persists, and neutral rates climb, the appeal of US Treasuries as a portfolio hedging tool is diminishing, according to the top executive of Citigroup's Australian business.
Mark Woodruff, Chief Executive Officer of Citigroup Australia, stated that 10-year US Treasuries yielding 5% typically serve as an ideal hedge against equity allocations, but the current market environment of rising consumer prices and interest rates has weakened demand.
Speaking in an interview on the sidelines of the Citi Australia and New Zealand Investment Conference in Sydney on Tuesday, Woodruff said: "Demand for hedging products has increased, but the situation this cycle is somewhat different."
"There are still some issues in the bond market to work through. We are dealing with rising supply, increasing neutral rates — these pressures themselves make bonds less easy to serve as a hedge than in previous cycles," Woodruff said.
These remarks reflect a shift in how the market views the role of safer sovereign bonds like US Treasuries in portfolios. In recent years, rising stock-bond correlation led some investors to turn to other investments, including hedge fund exposures, credit, and commodities.
In September, during a brutal global bond selloff, the yield on 10-year US Treasuries reached its highest level since 2007, partly due to higher energy costs driving inflation.
"Central banks globally are facing higher neutral rates. Inflation has been quite stubborn, and what we need to ensure is that inflation expectations do not become entrenched," he said.
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