Citi Australia CEO Mark Woodruff said rising supply, persistent inflation and higher neutral interest rates are reducing the appeal of U.S. Treasuries as a portfolio hedge. According to Sina Finance, Woodruff said a 5% yield on 10-year Treasuries is usually an ideal hedge for equity allocations, but rising consumer prices and interest rates have weakened demand.

Speaking to media on Tuesday on the sidelines of the Citi Australia and New Zealand investment conference in Sydney, Woodruff said demand for hedging products had increased, but that this cycle was different. He said the bond market still faced challenges: supply was rising, and higher neutral rates were making bonds less effective as hedges than in previous cycles.

His remarks reflect a shift in views about the role of safe government bonds such as Treasuries in portfolios. Rising correlations in recent years have led some investors to consider alternatives including hedge funds, credit products and commodities.

In September, the 10-year U.S. Treasury yield reached its highest level since 2007 as global bond markets came under heavy pressure, partly because rising energy costs pushed inflation higher. Woodruff said central banks worldwide faced higher neutral rates and that inflation had remained elevated. He added that it was important to ensure inflation expectations did not become embedded.