(Dow Jones) Betting against Treasury bonds was supposed to be the no-brainer strategy for 2010. Instead, shorting government debt has brought steep losses so far this year, due to surging bond prices as investors seek safety on worries stocks could be hit by deflationary headwinds.

The largest exchange-traded fund tracking the long end of the Treasury curve, the $3.3 billion iShares Barclays 20+ Year Treasury Bond Fund (TLT), has rallied more than 10% year to date. The ETF rose Friday in the wake of a disappointing July employment report.

At the same time, a leveraged ETF designed to profit from falling Treasury prices, ProShares UltraShort 20+ Year Treasury (TBT), has lost more than a quarter of its value as yields have ticked steadily lower-bond prices and yields move in opposite directions.

The Direxion Daily 30 Year Treasury Bear 3x Shares (TMV), which pours on even more leverage, has shed close to 40% so far this year.

Yields on the 30-year bond have compressed to about 4% as investors grow more skittish on stocks.

"Treasurys are supposed to be boring, low-return assets for retirees and the risk averse," said Nicholas Colas, ConvergEx Group chief market strategist. "Instead of playing bridge or canasta with Grandma, however, they have been the 'Cinderella story' of the capital markets this year."

Broken Over Bonds

The rally in Treasury bonds has been painful for many investors who took the other side of the trade. For example, assets in the ProShares UltraShort 20+ Year Treasury have vaulted to nearly $4.5 billion.

So far, the jump in Treasury rates that many predicted has failed to materialize. One key piece of the bearish thesis for bond prices is that government spending and deficits to fight the economic downturn are unsustainable, and that ultimately investors will demand higher rates to compensate for the risk.

Treasurys are in a bubble that could quickly unwind as rates rise or if investors rediscover their appetite for risk and move out of "safer" government bonds, the case goes. Some analysts worry supply could ultimately outstrip demand amid unprecedented issuance of Treasury bonds.