The apparent stabilization in the bond market of the past couple weeks could just mark the eye of the storm, according to a former Tudor Investment Corp. trader whose bets on ructions in fixed income have been paying off.

Just a small pick-up in inflation -- which has long undershot central banks’ targets -- could send bonds tumbling anew, says Brett Gillespie, who’s lured about A$370 million ($293 million) since July into a global macro fund he’s building in Sydney at Ellerston Capital Ltd.

Gillespie’s institutional fund is up 6.9 percent since it started in December, helped by protection that he bought in January, when he warned to clients that markets were in the danger zone.

He still thinks investors are underestimating the speed of U.S. monetary-policy tightening as inflation creeps higher, after the slide in Treasuries from September to early this month. And the risk premium for holding longer-dated notes is bound to rise, he says.

“We’re pretty convinced we’re in a solid bear market on rates,” Gillespie said by phone from Sydney, where he’s been building his fund after spending 11 years at the firm of the hedge-fund veteran Paul Tudor Jones. “We’re confident that wages are still making their trend improvement.”

Ten-year Treasury yields could easily reach 3.5 percent by the end of the year, he said in the interview last week. “We can get to 3.4 or 3.5 percent just by normalizing risk premium and having a modest rise in inflation or wages.”

Newly installed Federal Reserve Chairman Jerome Powell’s views on the policy outlook will be key, with congressional testimony on the economy pending Feb. 28. The Fed’s most recent projections were for three rate hikes this year.

The Ellerston fund is positioned for the chance that accelerating wage increases spur a steepening in the yield curve as longer-dated yields climb faster than shorter ones.

As for equities, Gillespie said the key is the speed and magnitude of a further sell-off in government bonds. Stocks could cope with a gradual climb up to 3.5 percent by the end of December for 10-year yields, but not if that happens within two or three months, he said.

“If the Fed’s not behind the curve you’re back in this ’04-’06 type analog where equities grind out 5-10 percent a year," he said.

The wholesale Ellerston Global Macro fund was up 6.9 percent, after fees, since it began in December through Feb. 14. That portfolio has twice the volatility of the firm’s retail macro fund, which is up 2.9 percent since inception in July.