Citibank Australia CEO: Three Reasons Why the U.S. Treasury Hedge Has Lost Its Appeal

According to the Zhihui Finance APP, the appeal of U.S. Treasury bonds as a portfolio hedge is diminishing amid rising supply, persistent inflation, and higher neutral rates, said the top executive of Citi’s Australia operations. Mark Woodruff, CEO of Citi Australia, stated that while 10-year U.S. Treasuries yielding 5% typically serve as an ideal hedge against equity allocations, the current market environment—with both consumer prices and interest rates on the rise—has weakened demand.

In an interview during a break at Citi’s Australia and New Zealand Investment Conference in Sydney on Tuesday, Woodruff said: "There has been an uptick in demand for hedging products, but things are a bit different this cycle."

"There are still some issues the bond market needs to deal with. We are facing steadily increasing supply and higher neutral rates—these pressures themselves make bonds less likely to serve as an easy hedge as they did in previous cycles," Woodruff said.

These comments reflect a shift in market perception regarding the role of safer sovereign bonds like U.S. Treasuries in portfolios. In recent years, higher stock-bond correlations have prompted some investors to seek alternatives, including hedge fund exposure, credit, and commodities.

In September, amidst a brutal global bond selloff, the yield on the 10-year U.S. Treasury reached its highest level since 2007, in part due to rising energy costs pushing inflation higher.

"Global central banks are all facing higher neutral rates. Inflation has been quite stubborn, and we need to make sure that inflation expectations do not become entrenched," he said.