Jones warns that inflationary pressures may be quietly building whilst the market focuses on deflation as the bigger risk.
He says: “The Bank of Israel (August) and now the Reserve Bank of Australia have raised rates. The US Federal Reserve has hinted it will start to reverse its ultra-easy stance once the economy recovers, and the Bank of Korea is also talking tough on inflation.”
Jones is nervous of short-dated positions and says he prefers to have cash on the sidelines in anticipation of a rise in yields.
He says long-dated financials and corporate bond yields can offer some protection from volatility in underlying gilt yields.
He says the gilt market is “potentially like watching a slow train crash”.
He says: “The asset class is under pressure from the eventual reversal of quantitative easing, deteriorating fiscal positions, the whim of credit agencies and a possible sterling crisis, all causing yields to rise and pushing up borrowing costs.
“We think the only way to stem this impact is for the Bank of England to force commercial banks to buy gilts.”