A little stronger. 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. And 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. You are right. 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 the year. And you throw in any sort of policy stimulus coming out of washington with tax reform, you have got to go with it. Lisa i agree. From my perspective in investmentgrade credit or highyield, 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. Why not . Lisa i think there have been a couple things. We have had some very sector specific issues going on, whether it is in the water line sector, 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 are going to see from the tax plan, i think coupled with the good growth, we are in a Good Environment for highyield. Bob it is not that highyield has performed poorly. It has done ok. It is just that there is a lot of rotation and equity now. If youre going to own the top of the capital structure of a company, you have got to like the bottom. If you have some stimulus from washington coming through, you have got to own the bottom. I think that is what we are seeing. Jonathan i spoke to someone from Morgan Stanley who thinks credit might be topping. He thinks highyield might be topping and that is a warning for the fx market. Is that is something you are thinking about . Bob i dont see it. Because i look at credit spreads, and credit spreads at 370 basis points over look pretty generous for a 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 i wont say bearish, but less bullish. What is behind that . The credit spread level, 570, and 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. Are they going to keep going down to equities . To bobs point, 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. You know what i like, i like highyield. You know what i like more . 80 ones in europe, that is the greatest story out there. You got an improving europe, growth is great. You have got banks that 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. Lisa equitylike returns. Jonathan do you think they have more to go . Lisa i think they have more to go. Jonathan what will take us there . Lisa i think it is the weight of money. 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. Why not go to the area where you get the best opportunity, which is banks in europe. Jonathan lets go Bigger Picture and think about banks in europe. 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, trying to do it through bonds, yields just a really low on 30 basis point on the german 10year, multiple expansion in the equity market. To lisas point, cocoas have had a great year and maybe well have another one, but 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 . Jonathan why do you keep doing that . Bob because when you swap it back to dollars, you are getting the yield of just over 5 . So 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 back 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 it is going to be both, actually. I think we are going to seek credit spreads and european highyield drift back down to 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 europe the last couple of years. Is it 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 actually extend qe beyond when they said the taper would end. They do not foresee raising Interest Rates anytime in the nearterm future. The. 4 andut where companies will fund themselves, you have got to go with it. Jonathan there might be a reprice in bunds. You have to recognize to some extent there is Interest Rate risk in the corporate debt market because of this method massive Asset Purchase Program the ecb has conducted. You are not concerned at all about european credit . Given the ecb is stepping back . Theyre 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. And it is corporate credit. The other thing to carry on from that, it is not just europe. 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 still cant find value by buying u. S. Corporate bonds, hedged back into japanese yen. Jonathan final word on europe, bob. His 2018 the year the buns reprice and get away from the craziness at the front end . Bob i think so. I actually think the growth looks wonderful in europe. It is going to put pressure on the ecb. I do think you are going to 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 stub qe in the last few months of the year. I think the focus by midyear will turn to when are they going to raise rates . Jonathan bob michele and a special thanks to lisa coleman, who heads up credit here. 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. To develop outpacing the develop market. Still 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 his dear clear of em in a big way. That was a bad call. What happened . Pierreyves growth is good for em. I think people tend to forget that. When you look at history, its always good. An 2018 18, it seems the growth environment is still 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 and underestimate what was happening with 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 bob, what was the argument that treasury yields stayed stubbornly low and the dollar weakened aggressively 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 debt teased us all year long. It had the high real yield when you had zero real yields in the developed market. Coming out of the trump victory, the emergingmarket currencies were a bit undervalued. So you could pick up high real and get a tailwind. I think actually you didnt get the trump stimulus and 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 view for next year on treasuries. Looking for the elusive 3 on the u. S. 10 year that 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 has rallied over basis points 35 this year. I can point to the entirety of outstanding treasuries that is the funding rate of the u. S. Government that has risen 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 through stimulus at the start of the year, we had to revise our expectations. The fed looks 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 price insensitive buyer exit the market. I think you will see a bearish steepening of the yield curve next year. Jonathan so you are still a treasury bear. 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, more than expectations. Em has done very well. As long as Central Banks are well telegraphing what they are doing, we need to keep in mind also that em is in much better shape. They have balance the books alive. Balanced the books alive. 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 very 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. Obviously 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. Growth is really the central case. Jonathan in terms of the sector breakdown and credit, the big story this year has been technology. Technology in emerging markets is something people might not have valued enough. Tech and emerging markets. When people think about commodities stories, Energy Mining in e. M. 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 is we think that 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 we have had a bond rout, whether induced by the government or not, there has been a bond rout in china. Why has that not bled to em . Pierreyves i think people miss that it is good news. It is good news that the delivery is happening. There is tightening, more defaults, and we think that is good news because deleveraging 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 represents 70 now of gdp growth in china. That is the reason why with those two drivers, industrial and consumption, china has 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. Again, not everything in em. We are coming to a tighter level right now. A big thing next year will be differentiation. One of the differentiating factors 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. The question for us is jonathan im assuming you share pierres 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 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 have got this stimulus coming still 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. We are going way back. From j. P. Morgan Asset Management sticking with me 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 end and rally the long end. Bob will 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 here in new york. 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 also have been going futures on the cme. 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 2017 annualichele 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. Issue of a utility. 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