Jeremy Siegel says Treasurys crashed because everyone forgot they're a bad inflation hedge while stocks 'do beautifully'

• Bond yields have surged as investors realize the asset is a bad inflation hedge, Jeremy Siegel told CNBC.
• Instead, stocks are a much better hedge and will perform "beautifully" against inflation, he added.

The bond market crash of recent weeks stems from the asset class' ineffectiveness against inflation, Wharton professor Jeremy Siegel told CNBC.

Treasury yields, which move inversely to prices, have soared amid a massive US bond sell-off. Market observers have pointed to a range of reasons, including a strong US economy that will require extended tightening, the retreat of foreign investors from the Treasury market, and massive federal deficits.

But Siegel highlighted another major reason that's been overlooked.

"Bonds are great hedges against geopolitical risk, against financial crises, but they're very bad against inflation," he said on Tuesday. "We didn't have inflation for 40 years, so everyone sort of forgot about that bond-bad inflation outcome."

After the pandemic triggered a spike in inflation, traders shifted out of Treasurys, with yields now near 5%. If inflationary bouts persist — a possibility traders are opening up to — then the returns on long-duration bonds will gradually lose out.

Put another way, Treasurys' reputation as a hedge against stock risk has been damaged as inflation rises, Siegel said, noting that equities will perform much better under inflationary circumstances.

"Stocks in the long run — and I've done all that long-run data — are excellent long term edges. You're planning a 10-year portfolio, a 15- to 20-year retirement portfolio: stocks do beautifully against inflation. Bonds do not," he added.

Though Siegel sees inflation slowing down, he warned that growing federal deficits and other factors could bring back inflation to pandemic levels.

Meanwhile, if the economy tips into a recession, investors will have a chance to load up on cheap equities, he said.

"If we have a recession, yeah, I think stock prices will go down. But one thing has always been true: They go down too much in recessions, and they proved to be unbelievable buying opportunities," Siegel said.

Not everyone shares Siegel's outlook. In a recent note, Oaktree Capital founder Howard Marks encouraged investors to make bond assets a major part of their portfolios, noting that some offer the same level of returns as equities.