Bond prices have been soaring since U.S. job growth hit a wall in June. Yields on government bonds have dropped to levels last seen in March 2009, when stocks were still reeling from the post-Lehman Brothers bust. The 10-year Treasury yielded 2.6% Wednesday, down from 4% just four months ago.

With hopes of a V-shaped recovery fading, income-generating bonds look like a smart play.  But Siegel writes in an op-ed published Wednesday in the Wall Street Journal that “those who are now crowding into bonds and bond funds are courting disaster.”

Siegel, author of “Stocks for the Long Run,” notes that if interest rates merely rise back to levels seen in April, recent buyers of 10-year Treasury bonds will face capital losses more than three times the size of the interest payments they stand to receive in a year.

He likens the recent rush to bonds to the tech stock bubble that burst a decade ago, comparing government bonds trading with a 1% yield to Internet stocks that traded around 2000 at 100 times earnings. All it would take to bust the bond market, Siegel suggests, is a sign that current pessimism over the economic outlook is overdone.

Siegel’s right about the bond market walking a tightrope. But even those who agree with Siegel concede that there is no sign that a gust of economic recovery winds that might knock bond prices into free fall — which means the current, apparently unsustainable, bond rally could continue for longer than anyone might like to say.

Stuart Schweitzer, global markets strategist for JPMorgan Asset Management, says the bond market is currently discounting a long period of subdued growth. That may not change till policymakers led by Fed chief Ben Bernanke act to eliminate the risk that falling prices will stall the U.S. deleveraging cycle, he said.

“The odds will grow with time that policymakers will shift from fighting inflation to fighting unemployment,” said Schweitzer.

But after spending more than $1 trillion on bond purchases to keep money flowing through the economy in 2009 and early this year, the Fed is moving cautiously. It said last week that it would buy more Treasurys with the proceeds of maturing mortgage bonds to keep the money supply from contracting, but falling inflation expectations (see chart, right) suggest it needs to do much more.

And with questions about taxes and spending cuts unlikely to be settled till after the midterm congressional elections in November, another period of uncertainty likely lies ahead. In the meantime, bond yields could go still lower, absent an unlikely Fed intervention or a surprisingly strong jobs report next month.

Meanwhile, the plunge of bond yields isn’t just a U.S. phenomenon. Yields on Japanese government bonds have dropped from already low levels to a minuscule 1% on 10-year paper. The Japanese experience, where 10-year yields haven’t risen far above 2% since the late 1990s, shows a bond market rout is no sure thing.

“Policymakers will find a way,” says Schweitzer. Perhaps. But it will take time – and lots of it.