• U.S. Treasuries are behaving more like risk assets during inflationary shocks, according to Nomura Asset Management International (NMR).
  • A jump in energy costs has effectively removed the prospect of near-term Federal Reserve rate cuts.
  • The traditional safe-haven role of Treasuries is being challenged as inflation persists.

Treasuries Lose Their Luster

U.S. Treasuries, long considered the world's safest asset, are losing their safe-haven status amid persistent inflationary shocks, according to Nomura Asset Management International. The firm's analysis highlights that during periods of energy-driven inflation, Treasuries have begun to behave more like risk assets, moving in tandem with equities rather than providing the usual portfolio hedge.

"The inflation shock, particularly from energy costs, has fundamentally altered the correlation between Treasuries and risk assets," said a Nomura spokesperson in an interview. "This effectively removes the prospect of near-term Fed rate cuts, as sticky inflation keeps policymakers on hold."

The comments come as the yield on the benchmark 10-year Treasury note remains elevated, hovering around 4.5% as of Wednesday. The jump in energy costs, driven by geopolitical tensions and supply constraints, has pushed headline inflation higher, complicating the Federal Reserve's path forward.

A Shift in Correlation

The BIS (BIS) has also noted that recent shocks have weakened the usual negative correlation between Treasuries and stocks, a cornerstone of portfolio diversification. This means that during inflationary episodes, bonds may no longer reliably offset equity losses, exposing investors to greater volatility.

"The 'higher for longer' narrative is still dominant," the Nomura official added. "Until inflation expectations cool, Treasuries will remain under pressure."

Analysts point to fiscal concerns and debt supply as additional factors eroding the risk-free premium. "Without a deal on fiscal consolidation, the safe-haven status could be further undermined," said a market strategist who asked not to be named.

Implications for Investors

For institutional investors, the shift challenges traditional portfolio construction. Pension funds, insurers, and global reserve managers that rely on Treasuries for capital preservation may need to reassess their hedging strategies. The immediate outlook is for continued yield volatility, with the Fed unlikely to cut rates until energy prices stabilize.

Correction: A previous version of this article misstated the name of Nomura's asset management unit. It is Nomura Asset Management International.

Attempts to reach the Federal Reserve for comment were unsuccessful.