Heads you lose: If rates remain low, then Treasury bond investors are taking considerable interest rate risk for zero return over inflation. TIPS (Treasury Inflation Protected Securities) yields are close to 0% despite their recent rise (green line in the bottom panel of the chart below).

Tails you lose: If long-term interest rates eventually return to early-2011 levels, as we expect, then longer-dated, low-interest bearing bonds will see losses. A 10-year Treasury will lose roughly 9% in value for every 1% rise in interest rates.

David Fuller's view The Weekly View provides an excellent summary of the current situation in US government bonds.

Some momentum investors, including hedge funds, are sensibly taking profits in long-dated government bonds and shifting at least a portion of this capital to equities. Other longer-term endowment funds risk being complacent, not least because they have done exceptionally well in this secular bull market for Treasuries.

However, the 31-year plus bull market in Treasuries is slowly ending, as we have been suggesting for a number of months. The evidence of this is seldom conclusive until it is obvious to investors, and of course, the Fed is still a massive buyer. Nevertheless, early warning signs are beginning to appear in the charts.

For instance, the Merrill Lynch 10yr+ US Treasury Total Return Index (weekly & historic monthly) saw an upside failure in April and has pulled back to its range lows of the last year. If it clearly breaks downwards from this range, I believe that would be the first time we have seen an upside failure followed by a breach of a potentially important support level. This would represent a further erosion of profits over the last year, pressuring some investors to reduce long positions. Conversely, if it rallies back above this year's highs with the help of the Fed, investors in Treasuries will no longer be under pressure to sell.

Additionally, US 10yr Treasury yields show evidence of base formation development. Here also the evidence is far from conclusive but you can be certain that Fullermoney and The Weekly View are not the only services studying this action and wondering if the yield low at 1.3790 on 27th July 2012 (weekly & historic monthly) marked the final low. Looking at the historic chart, there have obviously been many other lows and more significant rallies since yields peaked in August 1981. However, Treasury yields have not been this low for many decades, and a 32-year bull market is 'long in the tooth' by definition.

Lastly, you may be interested in this article from the Financial Times: US funds left bruised by heavy bond losses, kindly forwarded by colleague Jackson Wong. Here is the opening:

Every one of the most popular class of US mutual funds investing in bonds lost money in May, highlighting the risks for investors as interest rates rise.

Bond yields around the world soared from some of the lowest levels in decades last month as investors anticipated an end to the extraordinary measures the Federal Reserve has used to stimulate the US economy.

US funds that invest in higher-rated bonds with average maturities of under 10 years lost an average 1.8 per cent in May, marking their worst performance since the depths of the financial crisis in October 2008, according to Lipper, a research group.

Such a broad decline has been rare for these funds. With more than $900bn in assets, these investment vehicles have attracted the lion's share of inflows from savers in search of regular income and low risk since the crisis.

Personally, I would not want to be long of Treasury bonds for any reason. I will also resist any further temptation to short them while QE continues and a clear bear trend of rising yields has yet to be established. Eventually, the best short play may be out of the money put options. However, subscribers who specialise in bond markets will know more about this than I do.