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Those investors still gobbling up US government bonds as a nice defensive investment could be in for a nasty surprise, according to James Montier, a member of GMO’s asset allocation team.

Speaking at the CFA Institute’s European Investment Conference in Copenhagen, Montier said there was currently no margin of safety for investing in bonds as yields were just too low. “Rather than being a risk-free asset this could be about to become a return-free risk,” he said. “Historically, when people have bought bonds at these levels they have received a zero return or worse.”

Montier rejected the notion put forward by bond-bugs that the US was heading in the same direction as Japan 10 years ago, as the Federal Reserve has responded much more quickly than the Bank of Japan to fight deflation.

“Everyone loves government bonds at the moment because they have just delivered some incredible 10 year returns, but flows into bond funds are now higher than equity fund flows at the height of the TMT bubble,” he said, sending a shiver up delegates’ spines.

Montier also pointed to another lesson from history – Fortune 500′s “10 stocks to last the decade”, unveiled in August 2000, which included names such as Enron and Nokia. “The average P/E at the time of purchase was 347x,” he said. “Where was the margin of safety? It’s a similar problem today with US government bonds.”

As well as insisting on this margin of safety for investors, Montier proposed several other immutable rules of investing ranging from:  “Be patient” to “Be leery of leverage”. Montier prefers cash at the moment to equities and bonds, which he said was was like trying to choose between two ugly sisters. “I’d prefer to hold out for Cinderella,” he said.