Economy is not significant, we overheated. There is no sense and in overheated economy or a tight labor market. Wage increases are modest. We dont see wages having tightness. Been below the 2 objective for most of the past five years. Is a transitory or are there more fundamental things at work . I think we are all watching carefully to see. We think it is important to gradually move our policy rate towards a neutral level. The economy are strong, unemployment is low, growth appears to have picked up. It is time for us to be normalizing interest rates. Around theoining me table in new york, cohead of Global Management for fixed income at global sacks. Chief investment strategist of fixed income. Coming to us from london is thinks Income Portfolio manager j. P. Morgan. Great to have you on the program. I want to begin with you. What will change for the fed given that the two individuals stay the same. Mike i dont think a lot what a lot will change but there are several differences. I think they are both consensus builders. I think you will not see anything extreme out of power, but there are subtle differences. Number one, powell is more focused on markets. Equitycontinue to see market and continue to run, powell will do that as a signal of overheating. On the margin, may be hawkish in that regard. The second thing is in regards of regulation. Chair yellen was focused on reports towards the Banking System and overall regulation under the Obama Administration was constraining for banks. I think howell will be a little bit more practical and that will potentially lead to more lending on the bank site. Jonathan the kind of things that mike put on the table, is that enough to take us out of the current reigning ratings that we currently see . I dont thinkana it will be at the stabilizer for markets. More policyot certainties. For longterm investors, that is a good situation. We know that the fed will be gradually hiking rates and powell has the same message. I think he has approached regulation saying there is an opportunity to have a more approach. He will be supported for this institution. For investors and fixed income and in credit, this is a very positive outcome. Jonathan for the treasury market so far it has just been a yield curve. Inflation is still soft and the fed is still moving. Re is the front end bearish the front and an bullish the long end. Less room there is for the bullish, the long and part. Looking back at the last year there has been very Little Movement in longterm yield. That will be the case going forward. There are two differences right now compared to a year ago. The first one is, they have hiked on basically, once a get done here, 100 basis points. Inflation is measured by the core pc that should come down from 18 to 14. You cannot be sure what it will do. They are expecting it to go up, they have asset markets high and the economy is doing fine. But keep chipping away at it and it will be increasing friction surrounding these heights the closer they get. I actually do not think this will be a goldilocks scenario for bonds. Whether for treasury or credit. 2018 will be a very challenging year. Jonathan what changes it . Michael idol think the difference is who is the fed chairman, i think the difference is one of the fundamentals . We have been in this one wave cycle of easy money, low inflation and a modest level of growth differentials across the country and for a little volatility. Picture in 2018 the changes. I think there will be a normalization of risk premium over all. When you start to see Central Banks were moved to accommodation, the u. S. A starting, ecb is starting. There is talks of changes in japan. It changes the game. When you look at the yield curve now, everyone talks about how it will infer it. It would only invert if we thought that we would have a recession in the u. S. There is a very low probability to that. Releasedl spirits are in the economy. We think that that will introduce a curve steeper. If you look at a couple of things that are interesting to look at, one is to take a look at the yield curve that happened recently. For people calling conversion, we are not calling for that. What is happening in the tips market. This is a line above where you start to see inflation eating points back in. What we think will happen is, with the strong economy, with fiscal stimulus right now, we actually think you will start to steve start to see inflation get up to it 2. 5 , but you will see rates rise. Jonathan what you say back to that, that we get a big change in the regime next year . Diana i think next year will be a positive outlook for growth, but i agree with the sentiment on duration. The outlook for duration is likely to be less cut next year, partly because of the normalization he is talking about in absolute rate levels. It said, we have to take a broader global look. Huge, hugeill a demand coming in from the rest of the world for risk assets. Going to change overnight, or over the next few months. We think that will be a story that plays out for longer while the ecb are stepping back, they are not talking about retakes because we still have a huge that keepsurope closing but coming from an elevated position. Same story off of japan. Jonathan free you, you guys have been failing the reflation story throughout 2017. Will it change for you in 2018 . Robert yes and no. You cannot paint it with that brought as a brush. For us, it was really worked for being in the u. S. Being along the back and has also helped, the being short the front end. As we go through next year and the ecb table, we will have to see tuned to see of there is opportunity for similar trades in europe. I think on the cycle and the risk premiums, it could be way too early to get cautious. The fed, in contrast to earlier cycles, is much more careful and raising rates are going at a slower pace. From target. Away bank of japan printed cpi last night. Energy at 0. 2 . Core inflation at 1. 1 . Euro is shooting up. That will forestall anything and reduction of accommodation from europe. Reallynterest rates have not even risen over the last several months to a year, even after. I think there is a super low, long rate environment and that will anchor our backend. It will be positive for risk markets. Jonathan you are going to stay with me. Coming up next, the Auction Block, alibaba host the biggest china offering in 2017. This is bloomberg real yield. Jonathan this is bloomberg real yield. I want to head to the Auction Block for we star in the United States with the treasury. A 28 billion salary. A yield of 2. 3 . The bid to cover ratio since february 2016. Indirect bidders buying the lowest share in 16 months. Smart money went long. The university of oxford sold 1 in 2017in bonds due with a yield a 2. 5 percent. It may be the first 100 year observation to be sold. The big highlight this week. Held the biggest chinese offering of 2017, attracting 46 billion in orders, more than six times the deals. The longest portions of the offerings, 1. 58 over comparable government debt. Still with me around the table, from new york is mike from goldman sachs. And diana from jpmorgan. Billion dollars of demand. The wall of demand leading a flood of sub flood of supply. Markets are open. There is a ton of liquidity. The craziest manifestation of. Hat is, the bitcoin but there is a spectacular amount of money in places where the rates are incredibly low, whether it is japan coming out of china, coming out of korea, the rates are very low, there is not a lot of product. Dollar markets are open, a wide range of products here. Give hillary are in the cycle, we will have some kind of an. Vent jonathan was at the fact that it was a single issuer with a better yield . Michael i think it is the latter. The fact that the Chinese Company is attractive to too many people, there is an enormous amount of capital in asia that is really earning nothing right now. We have concerns. Particularly around china. Even though you have a very high Quality Company that is issuing, maybe china continues to grow modestly over the course of one to three years. Their one year debt or three year debt might be fine. The idea of lending to a Chinese Company for 30 to 40 years when there is a massive debt problem in that company in that country, we have a challenge with. Also the structure with some of these deals. There are questions about, as a bondholder, your rights to the actual intellectual capital of the firm. Arere not big fans and we pretty significantly underweight chinese credit. Jonathan the underweight chinese credit happen to lead through alibaba, but they have ,ot bled through broader emis ways that happening . A chart thatave goes over where we do see opportunities. China is a bubbly type of market from a credit perspective and from many different perspectives. It is not likely to end today. The government has significant reserves. You have a debt problem that is likely going to come to ruse over the next three years. If you look at emerging markets away from china, particularly economies that are not directly tied to chinese growth. We think those will decline in the next couple of years. You have a huge rate differential, at a lot, strong are in earlyou stages in terms of recovery versus the u. S. , where we are in later stages. If you look at the differential in the chart, he see a massive differential between dibella market rates and emergingmarket rates. It will lead to rates coming down and the emerging markets, but we are exposed to the currencies. With Stronger Economic growth and emerging markets, we think appreciating currents their relative to a lot of develop market currencies. Jonathan do you see a reason to stay in there with em . Diana yes. I agree with everything. Emergingmarket prospects of positive. At this point in the cycle you have to be careful about where within emerging markets you are. The last fears we have seen a big recovery. Within the last few years we have seen a big recovery. You have high rates, a robust growth and you have strong external balances. Jonathan a twopart story here with alibaba. One is em and the other is what is happening with credit. Coming out effectively, many people said the following, it is not a coincidence that fundamental problems are becoming more apparent in the sector as the fed continues to withdraw liquidity. As is often the case, these risks are mistakingly being rationalized as purely idiosyncratic problems. This happened a few weeks ago when it was a little bit of a port pull back in credit and people said this is about sprint and tmobile. Yes it spread out, but they are very specific issues. What do you say back to Morgan Stanley . The drop inink correlation is healthy. You see credit to some degrees. At any given time there is some area getting bombed out whether it is retail, energy, looking back a ways. And emerging markets some of the sovereigns were in tough shape. Looking even at brazil and argentina. I agree, he need to be selective in emerging markets. Sovereigns in general look attractive. Whether looking at european peripheral. On the corporate side and emerging markets, there is a shorter maturity because of the difficulty in assessing those credits longterm prospects. Jonathan do not how many people have told me it is time to get defensive and credit . I am trying to understand what getting defensive in credit means. What going up in quality means. If you look at what has happened over the last couple of years and credit, leverage has been picking up across most ratings, with maybe the exception of the very top singleas and elsewhere. What is your view on what going defensive actually means . Michael i think alibaba is a good example to talk about here. If you wanted to get more defensive and go up in quality you buy into a company like alibaba. That does not change the fact that alibaba will be exposed to china risk and credit risk. I dont think the answer is to go up in quality, i think the answer is to have a relatively neutral produced neutral position, even moving towards it under rate. I know this idiosyncratic argument and when it become systemic is an interesting one. My grandmother used to say if you have a nickel becomes a dime than a quarter. It kind of matters. I dont agree are quite there yet, but there are a number of industries that have been hit with significant ins significant issues. The risk is higher. This is why volatility matters to credit investing. , theare the volatility more you need to get compensated for these risk. Bp is a perfect example. It is a Pristine Company but stuff happens. You need to get compensated. Jonathan is a time to be defensive . Tried to express that for me as to where you would go . Is the answer, very modestly. Not to completely remove it in portfolios. Have started to underrate underweight highyield. Carry, theyactive have a positive correlation and credit, but they are better projected in the event that we see credit events in the corporate sector. That is what we have been doing. Offer spreads that are more attractive and we find in investment rate traffic. Jonathan tell us yours more specifically. The product they think those are very good. On the volatility, i think what we have seen historically is that when the spread begins to spread out, it is after the fed is much further along in tightening and they break the system. In right now and the prior cycles, there is a lot of anxiety that can kick into early. That is my concern. Jonathan everyone will stay with me. I want to get a check on where the markets have been throughout the week. Twos, tens and 30s. We finally broke out of that tight range on the tenure and came back in. 236 is how we trade on the u. S. 10 year, up by a basis point of three. The longest down one. 276 on a 30 year. Featuring a potential u. S. Government shutdown and the jobs report. This is bloomberg real yield. Jonathan this is bloomberg real yield. It is time now for the final spread coming over the next week. Canadian Prime Minister travels to china to meet with the chinese president gigi and the u. K. Chinese president and in the u. K. You have a Germany Social Democratic Party convention as a Coalition Talks with angela merkel. And the United States you have a potential Government Shutdown as well as a u. S. Jobs report. Still with me, michael, robert and diana. Looking for to next week. Payrolls friday. What is your base case . Diana i expect we will see in line with 200,000 new jobs and at 4 . Ent rates steady nothing really that will derail the markets too much, but signs that the economy will bump trend. Jonathan we talked about breaking asset and 2018. Is there reason to believe Unemployment Rates will go lower and wage growth will squeeze down in a material way . Rateel the unemployment continues to decline. We do think we will continue to see it decline and we expect to tenths takena few off next year, probably go down 3. 7. Wedo expect to see where are in terms of tightness in labor market and the amount of hiring we are talking about here is likely to lead to some level some level of inflation. It doesnt have to be out of control to get rates. Do you anticipate a conversation with you and i this Time Next Year i say, unemployment is really low, the data elsewhere is terrific, why treasury yield is still around 240 . It is possible but i would bet you lunch that we will have a conversation. Robert i take the other side. Are rising, wages but they are up to the level that they have been a been at during past sessions. I think this is fighting the last war. The 1970s ofin breakaway inflation was probably a different environment. It was very contained. I think japan is a good example with a 2. 8 Unemployment Rate where they are not producing inflation. Tablean i have a december 1 for 2018 for three. If you can make it over diana, you can come as well. Lets get you all in the boxes. Lets begin with payrolls report. 200,000 with the meeting estimate of the bloomberg survey. Michael upside. Robert modest downside. Diana upside. Jonathan goldilocks saw the up of a new regime. Ichael regime. Robert goldilocks. Diana goldilocks. Jonathan this is your personal view. Would you hold the coin or the 30 year alibaba issue through to the end of 2018 . Michael alibaba. Robert alibaba. Diana alibaba. Jonathan there we go. I guess that is sensible for you guys. Asset management, and anna from j. P. Morgan asset management. Really appreciate your time. From new york, that doesnt for us. See you next friday at 12 30 p. M. New york time. 5 30 in london. This was bloomberg real yield. This is bloomberg. Scarlett im scarlet fu, and this is etf iq, where we focus on the risk and rewards. Of Exchange Traded funds. Scarlet new incoming Federal Reserve chairman, same Monetary Policy could outsized stakes in real estate companies. Republicans clear another hurdle in the quest to cut taxes. What is the tax reform etf play . And how the surge in ecommerce is benefiting the timber and for street etf. Whether you embrace or fear etf,