The Unemployment Rate is a bit lower, and inflation is essentially unchanged. Mario draghi the strong cyclical momentum in the significant reduction of economics gives grounds for greater confidence that inflation will converge towards our inflation aim. Yellen i want to see it move up to 2 . Most of my colleagues and i do believe it is being held down by transitory factors, but there is work undone there. Draghi an ample degree of monetary stimulus therefore remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the mediumterm. Jonathan joining me today from j. P. Morgan Asset Management is bob michael, the global head of fixed income. Lisa coleman, the firms global head of Investment Grade corporate credit. Great to have you with us on the program. It is your turn to grill me. Bob dont you worry about that. Jonathan lets talk about goldilocks growth next year. We have experienced this for so long. Highgrowth, low inflation, and Central Banks staying in the game, and it is positive for risk. Does that change next year . Bob what is not to like about it . I love the Central Banks this week. They acknowledge the higher growth. They acknowledge moderate inflation. When it came to policy, they are looking the other way. You have got very benign rundown of the Balance Sheet. Almost no rating increases except for the fed. It is great for asset prices. Certainly the first half of next year. You throw in any sort of policy stimulus out of washington with tax reform, you have got to go with it. Lisa i agree. From my perspective, what is not to like . You have got accommodative conditions. You have great growth. Central banks are not raising globally at a rapid pace. You have the fed outlining what they are going to do. I think it is ideal conditions. Jonathan it makes sense for high yields to perform . It happens. Hasnt. Why not . Lisa we have had some very sector specific issues going on, whether it is in the retail sector, people are concerned. When you take a step back and look over at where defaults are, look at the positive benefits we will see from the tax plan. Double with good growth, we are in a Good Environment for highyield. Bob it is not that highyield has performed poorly. It has been ok. There is a lot of rotation and into equity now. If youre going to own the top of the capital structure of the company, you have to like the bottom. If you have some stimulus from washington coming through, you have to own the bottom. I think that is what we are seeing. Jonathan i spoke to someone from Morgan Stanley thinks credit might be topping. They think high yields might b12 topping and that is a warning for the fx market. Is that is something you are thinking about . Bob i dont see it. I look at credit spreads, at 370 basis points over look pretty generous for the default rate thats about 1 . If you think about some of the tailwind we will see in Corporate America next year with tax reform, the reduction in the the tax rate down to 21 , that is really nice for corporate profitability. I think we have a while to go. You typically see highyield spreads come in through 300 towards 250. Jonathan i spoke to you last time a couple of weeks ago and you sounded less bullish. What is behind the . What is behind that . Bob i recognize that. 570, thats a bit worrisome. Weve had a good run for a number of years. The Central Banks are definitely taking the punch bowl away. It is a question of how much longer do i want to ride it . I think the next couple of quarters for sure. Jonathan if you think about the returns people need, 5. 5 will not do it in highyield. Will they keep going down . If you look at the Capital Structures and you think the financials will be ok, why be at the top of the stack . Lisa i get the point on equity, but im a fixedincome investor. Jonathan youve got to be somewhere. Lisa you got to be somewhere. I like highyield. You know what i like more . A k1s in europe. You have got an improving europe, growth is great. Banks have built up capital. Think about where we have come from the Banking Sector in europe from the crash back in 2008. You have capital ratios just under 15 for the banks we cover. Why not come down in capital structure . Jonathan cocoas have had a great year. Do we have more to go . Lisa i think it is the weight of money. If you think about where we are in terms of negative yields. You have a large swath of the market trading at negative yields. Probably about 18 . Even if you look at the Central Banks starting to correct that policy, we have looked at forward rates. Maybe in the worst case you have another 3 that is no longer negative. Where do people go . They are looking for yield. Go to the area you get the best opportunity, which is banks in europe. Jonathan a lot of people have been more constructive about europe. The economy has improved. The ecb is still in the game. When i think about how difficult it has been to push that positive Asset Classes across europe, yields just stay low 30 basis point on the german 10year, multiple expansion in the xp market. It has been a difficult place to actually push through a positive view. Bob people have got it wrong. I am going to horrify you. We have been adding european highyield in the last couple days. You know what the total yield is . 2. 5 . Because when you swap it back to dollars, you are getting the yield of just over 5 . I look at that. I look at what i could do in the dollar highyield market of equivalent credit quality. I might as well take some european highyield backed up 50 basis points, swap it back to dollars. I have got the ecb with a dovish view underwriting the next few quarters for me. Jonathan from your perspective this is not a total return story, this is exclusively about yields. Bob i think we are going to see credit spreads back down toward 2 . I will pick up a couple percent on that. Then i am going to collect the 5 carry. I have been saying all year you cannot be greedy. If you wait for these pullbacks to be greedy, youre going to miss it. We have had a pullback. That is enough. Jonathan we have had a massive rally in the last couple of years. Is it not greedy to be chasing it . Bob we have had a tremendous rally in all Asset Classes for a while. But the ecb is the one central bank that is telling us they may extend qe beyond when they said the taper would end. They do not foresee raising Interest Rates anytime in the near future. You think about the. 4 . You have got to go with it. Jonathan there might be a reprice in bunds. You have to recognize there is Interest Rate risk in the corporate debt market because of this method Asset Purchase Program the ecb has conducted. You are not concerned at all about european credit . Given that the ecb is stepping back not stepping up. , lisa think about those negative yielding assets. Until that point happens, you still have to find a place to go to get positive yield. It is corporate credit. The other thing to carry on from that, think about japan. Japan has been the big story and continues to be the big story for us. Japanese investors still can find value, albeit less than it was over the past couple of years, but they can find value by buying u. S. Corporate bonds, hedged back into japanese yen. Jonathan is 2018 the year they get away from the front end . Bob i think so. I actually think the growth looks wonderful in europe. It will put pressure on the ecb. I think you will see inflation drift a bit higher on the core rate than their 1. 1 expectation. I dont know they will be able to do a continued qe in the last months of the year. Three i think the focus by midyear will turn to when are they going to raise rates . Jonathan bob michele and special thank you to lisa coleman. Next up we focus on emerging markets as china follows the feds lead and tightens monetary policy. This is bloomberg real yield. Jonathan from new york city, i am jonathan ferro. This is bloomberg real yield. At j. P. Morgan Asset Management headquarters here in new york city for the year that was and the year ahead. In 2017, it was definitely the year for emerging markets. We have seen em credit rip higher. With us is bob michele, global head of fixed income, and joining us is pierreyves bareau, the head of emergingmarket debt. When you think about the things to fear in 2017, one of them was emerging markets. We were all thinking about this relationship between the United States and china, the potential for trade wars, and the idea you want to stay clear of em in a big way. That was a bad call. What happened . Pierreyves growth is good for em. People forget that. When you look at history, its always good. In 2018, it seems it is very conducive. Growth is good. Moderate inflation is good. Commodities is in good shape, and china is doing well. It is a Good Environment for em. Jonathan did investors overestimate the impact of politics . Pierreyves its something we need to care about in 2018. I think we should have headwinds coming to em from politics. A lot of countries, 40 of the em countries will be going through political transition. The second challenge will be the Central Bank Normalization of the main Central Banks. Jonathan it was just treasury yields staying stubbornly low and the dollar was weakened and everyone ended up disappointed, and that helped drive em returns. It wasnt about em. It was about elsewhere. Bob there was some of each in those statements. Emergingmarket teased us all year long. It had the high real yield when we had zero real yields in the developed market. Coming out of the trump victory, the emergingmarket currencies were a bit undervalued. You can pick up high real yield and get a tailwind. I think actually we did not get the trump stimulus. That was clear by the end of the first quarter. The dollar came off and emergingmarket debt looks pretty attractive. Jonathan i want to tease out your review on treasuries. You are in view for next year on treasury. The 10year will not come through. Are you still looking for that next year . Bob we go back and forth on this, dont we . You can point to the 30year as rallying over 35 basis points this year. I can point to the entirety of outstanding treasuries that is the funding rate of the u. S. Government raising 30 basis point. It surprised us that yields in the long end have not gone up a bit more this year. I think certainly when there was a failure of the administration to get stimulus at the start of the year we had a revised had to revise our expectations. The fed is committed to raising rates at least three more times. We will see what happens when qe winds down and we go from Balance Sheet expansion to contraction, and the buyers exit the market. I think you will see a bearish steepening of the yield curve next year. Jonathan can you be a treasury bear and an em bull . Bob it is the pace. Right now, the developed market Central Banks are being overly cautious in how they normalize policy. Pierreyves in the past two years, the fed has been hiking quite a bit, even with expectations. Em has done very well. As long as Central Banks are telegraphing what they are doing, we need to keep in mind they have balanced the books a lot. Jonathan where do you have the most conviction around em . Surprising things for a lot of people this year might have been emergingmarket europe, eastern europe. Latam not great, Southeast Asia mixed. How are you looking at things regionally . Pierreyves we see three big opportunities next year. We think highyield in emergingmarket. We are more or less away from the 10year average. That is the value trade in our portfolio. We are targeting the countries where there is upgrading. South africa is part of that, and Central America as well. The Second Opportunity is countries that are growth related. Central europe and asia. We think that carry will be more of a challenge next year. Carry will be less appealing. But gross is the central case. Jonathan in terms of the sector breakdown in credit, a story is technology. Technology in emerging markets is something people might not have valued enough. When a lot of people think about commodities, the story is energy and mining. Is that something you are focused on . Pierreyves that is why we are big on china. Contrary to market expectation which is downbeat on china. The reason why we think this slowdown is much more solid in terms of growth. One of the reasons is this industry upgrading. The fact that more than 50 of the capex in china is going to Technology Oriented sectors, which makes growth in china much more robust than the market thinks. Jonathan there has been a bond route in china. Why has that not bled to em . Pierreyves i think people miss that is good news. It is news that it is happening. There is tightening, more defaults, and we think that is good news because leveraging is finally happening. China is rebalancing into the newer sectors we were talking about. It is rebalancing from the supply model to a demand oriented model. Consumption is now 70 of gdp growth in china. That is the reason why with those drivers china is a much better footing than people think. Jonathan i should be bearish on old economy china exposure . Pierreyves china is a big factor for em. Being more optimistic on china makes us very comfortable with em in general. Not everything in em. We are coming to a tighter level right now. The big thing next year will be differentiation. One factor will be politics. You have the big value opportunities in local markets. A lot of countries are beyond 10 of the yield. The election will matter. It will differentiate winners from losers. Jonathan im assuming you share his confidence around emerging markets . Bob i do. By the way, im impressed with the way china policymakers have handled things. We want them to rein in credit a bit. We did not talk about the way the pboc snuck in a decorative rate hike on the heels of the fed. They are doing all the right things. If they are doing the right things, and you got this stimulus coming out of the developed Central Banks, you are going to have a pretty Good Environment for emergingmarket debt. Jonathan i believe a number of years ago they delivered a rate hike on Christmas Day as well. Bob michele, pierreyves bareau, thank you for joining us. Next up, we have a look ahead to 2018. Before we get there, a check on where bonds have been this week. Twos, tens, and 30s. It is a flatter yield curve on the front and and rally the long end. Bob give us the annual bond market awards next from j. P. Morgan Asset Management. This is bloomberg real yield. Jonathan from the new york city, for our audience worldwide, i am jonathan ferro. This is bloomberg real yield at j. P. Morgan assets trading floor. It is time for the final spread. Coming up over the next week, there will be a slew of u. S. Economic data released. Including housing and personal spending. You will have bitcoin futures. We wont deal with that right now. A boj decision, Regional Elections in catalonia, and all eyes on washington for a tax vote and a potential government shutdown. What i want to do with bob michele is something he does every year, the bond market awards. I think it is absolutely brilliant. Bob we are going to have some fun now. Jonathan were going to rattle through them. You chose bond of the year. Can you walk me through bond of the year . Bob in distorted markets you have to look for something that is most distorted. I went with the violia zeroes, a threeyear tripleb rated issue. Forget about the fact that they borrowed money for three years. They actually got lenders to pay them money to take their money. It had a yield of 3 basis points. If that is not a sign of distorted markets, i dont know what is. Jonathan you took a pass . Bob we did. Jonathan Lifetime Achievement award . Bob got to give it to janet yellen. I actually think she is a really cool lady. She got into the fed. She helped normalize policy, and she is also the fed chair in 40 years to have a term without a recession happen. Jonathan comeback player of the year . Bob lots of potential candidates. It has got to be developed market government bonds. Every time i am on, you keep telling me they have not gone up in yield. We have not had the bear market i said we were going to have. They should have. Dont they know growth is where it is accelerating . Jonathan is it going to happen next year . Bob certainly by this Time Next Year it will because the distortion by the Central Banks is not going to be there. Central bank Balance Sheet expansion turns to contraction. Jonathan unsung hero . Bob another good one. It is the yield curve. It has to be. The front end of the market went up in yield. If youre a shortterm investor, it is the yield curve. Looks great. What about if youre a longterm investor . You made some money. Jonathan most valuable player of the year . I want to spend a little bit of time on this. Bob most valuable player, i went with quantitative ease. Jonathan still. Bob there is a number of ways to look at it. If this were january 1, 2017, we couldve put all the sectors and Asset Classes on the wall, throw darts at them, and the portfolio would have been up in value. Are we just good dart throwers . Or is there something bigger going on . The fact that Central Banks keep printing money, 160 billion a month. It comes into the market, ripples through. It means you dont get corrections. It is why the equity market has not corrected more than 3 this year. Jonathan are we approaching an Inflection Point next year as far as qe is concerned . And its impact on markets . Or is the size of the Balance Sheet still going to remain powerful . Bob it will remain powerful, but because the inflow will turn the way the Central Banks have laid it out with the ecb doing 30 billion over the next nine months, the fed stepping up its rundown to 20 billion a month in january, and it steps up every quarter. We will see with the bank of what the bank of japan does. Balance sheet goes from expansion to contraction. When you have a correction in the market, say the summer of 2018, you will not have that big pool of money being printed that is going to come in and support bonds and then spillover into everything. Jonathan when we do this this Time Next Year, the twoyear in germany will not be yielding 70 basis points . Bob i dont believe it will. It may still be negative. Jonathan we are going to cut this and clip it and plant next year. My special thanks to j. P. Morgan Asset Managements bob michele, lisa coleman, and pierreyves bareau. That does it from j. P. Morgan Asset Management. My special thanks to them for letting us do a full hour for Bloomberg Radio and on bloomberg tv right here from new york. I will see you next friday at 12 30 p. M. New york time. 5 30 in london. This was bloomberg real yield. This is bloomberg. Cannot live without it. So if you cant live without it. Why arent you using this guy . It makes your wifi awesomely fast. No. Still nope. 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