Citi Australia CEO: Three Major Reasons Why U.S. Treasuries Are Losing Their Hedge Appeal

Title context: Citi Australia CEO: Three Major Reasons Why U.S. Treasuries Are Losing Their Hedge Appeal Text: The appeal of U.S. Treasuries as a portfolio hedge is waning amid rising supply, persistent inflation and higher neutral interest rates, according to the top executive of Citigroup Inc.'s Australian business. Citigroup Australia Chief Executive Officer Mark Woodruff said a 10-year U.S. Treasury yield at 5% would normally constitute an ideal hedge against equity allocations, but the current market environment of rising consumer prices and interest rates has weakened demand. "There's been an increase in demand for hedges, but it's been a little bit different this cycle," Woodruff said in an interview Tuesday on the sidelines of Citi Australia and New Zealand Investment Conference in Sydney. "There are still some issues in the bond market to work through. We're dealing with increased supply, rising neutral rates -- those pressures in and of themselves make bonds less easy to use as a hedge than they have been in previous cycles," Woodruff said. The comments reflect a shift in how markets view the role of safer sovereign debt such as U.S. Treasuries in portfolios. That follows years in which rising stock-bond correlation has pushed some investors toward alternatives including hedge fund exposure, credit and commodities. In September, the U.S. 10-year Treasury yield reached the highest level since 2007 during a brutal global bond selloff, driven in part by higher energy costs that pushed up inflation. "Central banks globally are facing higher neutral rates. Inflation has been fairly sticky and what we need to make sure is that inflation expectations don't become entrenched," he said.