NEW YORK (CNN/Money) - Just days after a bond fund was recognized as the world's largest mutual fund, U.S. Treasury bonds on Monday extended a brutal selloff that could throw into doubt the "safety" of this traditional safe harbor -- and cause trouble for the U.S. economy.

Bond prices have soared this year, a symptom of investor anxiety about a recession that began in March 2001, the risk of further terror attacks and war in Iraq and a traumatic plunge in U.S. stock prices, among other horrors. Meanwhile, bond yields, which move opposite to their price, have fallen precipitously, helping keep interest rates low.

But, suddenly and dramatically, the bottom has fallen out of bond prices, pushing interest rates higher. The yield on the 10-year Treasury note, for example, has risen more than half a percentage point from a 40-year low close of 3.56 percent set on Oct. 9.

"We're seeing a bubble bursting in the bond market," said bond market strategist Jim Bianco of BiancoResearch.com. "It was way overdone; there was really no justification for bonds being at [such a low] yield."

This couldn't come at a worse time for investors, who have been pumping money into bonds at a blistering pace. More than $14 billion flowed into bond funds in September, according to fund tracker Lipper, and TrimTabs.com estimates that $13 billion more will go into bond funds in October.

Meanwhile, Pimco, the vehicle of guru-of-the-moment Bill Gross, said last week that its Total Return bond fund swelled to $64.6 billion by the end of September, edging the Vanguard 500 Index for the title of king of the mutual-fund hill.

"The people who are going to really get snapped in two here are those who were the last ones out of the equity markets, when the Dow Jones industrial average was in the mid-7,000s, and finally got into fixed-income funds when Treasury yields were [a half-percentage-point] lower," said Joel Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pa. "They took big losses, and then went into another asset that'll give them more losses."

Everywhere you look, investors seem to be fleeing for greener pastures:

• The Standard & Poors 500 index has gained nearly 14 percent since its Oct. 9 close;
• Calpers, the biggest U.S. pension fund, said last week it was putting more money in equities and real estate; and
• Even Pimco's Gross said last week that the rally in Treasurys was likely over and that Pimco was turning to European government bonds, mortgage-backed securities, and other issues.

"When risk aversion is declining, money will flow out of the safe-haven Treasury market into riskier assets," said bond market strategist Anthony Crescenzi of Miller Tabak & Co. "High-yield bonds have increased in price in the past week; holders of junk bonds are doing well right now."

Crescenzi was not entirely convinced, however, that the bond-market bloodbath would go on or that the recent blistering pace of bond-yield gains would continue for much longer.

"For yields to rise further would probably require a firming in economic statistics and/or a further sharp upward gain in equities," Crescenzi said. "Both seem somewhat improbable right now, particularly because of geopolitical factors [such as] an increasing degree of terror activity, the unresolved situation with Iraq and problems in North Korea."

For the economy's sake, it would be better if Crescenzi were right, since rising bond yields take other interest rates higher, including mortgage rates.

The broader U.S. economy has been supported this year by relentless consumer spending, which itself has been partially supported by low mortgage rates that sparked a glut of refinancing, putting more money in homeowners' pockets every month and letting them turn rising home equity into cash.

"The sharp rise in mortgage rates that is now under way threatens to limit the refinancing boom, limiting the cash that will be dropped into U.S. consumers' hands during the critical holiday-shopping season," said Rory Robertson, interest rate strategist at Macquarie Equities (USA).

For now, most economists doubt the gain in bond yields will be so dramatic as to smother the struggling U.S. economy. Even after the recent gains, 10-year yields are still more than a full percentage point lower than they were in May.

Merrill Lynch issued a note Friday that said bond yields seemed just about right and that it was actually increasing its position in mid-range Treasurys.

"The Treasury curve is much more reasonably priced for the mixed [economic] signals that are likely to continue for some time to come," Merrill fixed-income strategists Kenneth Hackel and Rajiv Setia wrote.