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. Morgans 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 yielding 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. 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 more thant, 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. 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. Rerating. 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. 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. 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. 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. 0being 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 talked to about how they 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. 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. Him him him him 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. Him jonathan comeback him 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, 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 . Is the size of the Balance Sheet still going to remain powerful . Him him him him him him him him him him him him him him him bob it will remain powerful, but because the inflow will turn down, i think that is something for the markets to digest. 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. Now were talking it gets you wifi here, here, and here. It even lets you take a time out. No no yes yes, indeed. Amazing speed, coverage and control. All with an xfi gateway. Find your awesome, and change the way you wifi. David what propelled you to want to join this company . Brian i always wanted to work for my dad. David did he say you could start at the bottom and work your way up, or did he say you could start at number two . Brian that is what i wanted to happen. 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