Should traders and investors short the US Treasury market? The bearish case is straightforward.

The budget deficit assures massive supply of government debt for years. Foreigners are having second thoughts about financing the deficit, highlighted by recent reports that China was selling some of its Treasuries. The crisis in Greece and elsewhere emphasises the risks of buying bonds from heavily indebted countries. Finally the expansion of the Fed balance sheet through a variety of lending and asset purchase programmes threatens both the central bank's credibility and its inflation performance. Higher inflation would surely push long-term yields much higher. Indeed a month ago a prominent author and hedge fund manager suggested that "every single human being" should be short Treasuries.

Maybe so. Certainly over the long run the US must rediscover fiscal prudence and reduce its deficits or face a costly rise in borrowing costs. However over the medium term - say the next several quarters, a reasonable investment horizon - there are reasons to expect the Treasury market to hold its own, and perhaps even surprise with lower yields.