US Treasuries are becoming less effective as a portfolio hedge as persistent inflation, rising bond supply and higher interest rates undermine their traditional defensive role, prompting investors to consider alternatives including hedge funds and commodities, according to a report by Bloomberg.

Mark Woodruff, chief executive officer of Citigroup Australia, said the current macroeconomic environment has weakened the appeal of US government bonds as protection against equity market volatility.

While 10-year Treasury yields near 5% would historically have offered an attractive hedge against equity exposure, persistent inflation and rising neutral interest rates have complicated their role in portfolio construction.

Speaking at the Citi Australia & New Zealand Investment Conference in Sydney, Woodruff said demand for hedging instruments was increasing, but the effectiveness of traditional fixed income strategies had diminished.

The shift reflects growing concerns over the correlation between equities and bonds, which has prompted some investors to diversify into hedge funds, credit and commodities to manage portfolio risk.

US 10-year Treasury yields reached their highest level since 2007 in September, amid a global bond selloff driven partly by rising energy costs and renewed inflation pressures.

Woodruff warned that increasing government bond issuance and structurally higher interest rates could continue to limit Treasuries' effectiveness as a defensive allocation, with central banks facing persistent challenges in containing inflation expectations.