Treasuries are losing their luster as a portfolio hedge as increasing supply, persistent inflation and rising neutral rates weaken their appeal, according to Citigroup Inc.’s top Australia banker.

By Haidi Lun and Richard Henderson US 10-year government bonds trading at a 5% yield would typically form an ideal counterweight to an equity allocation, but the current market backdrop of rising consumer prices and interest rates has weakened demand, said Mark Woodruff, chief executive officer of Citigroup Australia.

“There has been more appetite for hedging products, but it’s a little bit different in this cycle,” Woodruff said in a Bloomberg TV interview on the sidelines of the Citi Australia & New Zealand Investment Conference in Sydney on Tuesday.

“The bond market still has some issues to deal with. We’ve got increasing supply, we’ve got increasing neutral rates — those pressures in itself don’t lead it to be as easy a hedge as what it might have been in previous cycles,” Woodruff said.

The comments reflect shifting views about the role safer government bonds like Treasuries play in portfolios, after an increase in correlation in prior years pushed some investors to consider other investments, including exposure to hedge funds, credit and commodities.

In September, the US 10-year yield touched the highest level since 2007 in a bruising global bond selloff that partly reflected elevated energy costs pressuring inflation higher.

“Central banks globally — they’re facing into higher neutral rates. Inflation has been really stubborn and what we need to make sure is that inflation expectations aren’t embedded,” he said.