♪ jonathan: jonathan ferro. with 30 minutes dedicated the fixed income, this is "bloomberg real yield." ♪ jonathan: goldilocks dominating 2018 again. central banks, say yes predicting high-growth. tax negotiation's hours away from making a congressional compromise. an easy calm hangs over treasuries. is this year credit fails to match a massive rally in equity? we begin with the big issue, high-growth and low inflation in 2018. >> real gdp growth is stronger.

the unemployment rate is a bit lower, and inflation is essentially unchanged. >> the strong bills momentum in this significant reduction of economics, gives grounds for greater confidence that inflation will converge towards our inflation aim. >> i want to see it move up to 2%. most of my colleagues and i believe it is being held down by transitory factors, but there is work undone there. >> the apple degree of monetary stimulus, therefore remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium-term. jonathan: joining me today from j.p. morgan asset management is bob michele, the global head of fixed income. lisa coleman, the firm's global head of investment great corporate credit.

great to have you with us on the program. it is your turn to grill me. bob: don't you worry about that. jonathan: let's talk about goldilocks growth. we have experienced this for so long. low inflation and central banks staying in the game that is positive for risk. does that change the here? 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 i came to policy, they are looking the other way. you 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. you throw in any sort of policy stimulus out of washington with tax reform, you got to go with it. lisa: i agree. from my perspective what is not to like. you 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? lisa: with had some very sector specific issues going on, whether it is any retail sector, people are concerned. when you take a step back and look over at 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 high-yield. bob: it is not that high-yield has performed. poorly it has been ok. there is a lot of rotation and equity now. if you're 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. jonathan: i spoke to someone from morgan stanley thinks credit might be targeted. that is a warning for the exd market.

is that is something you are thinking about? bob: i don't see it. i look at credit spreads, at 370 basis points over the pretty generous for the default rate that's 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 tax rate data 21%, that is really nice for corporate profitability. i think we have a while to go. you typically see high-yield spreads come in through 300, towards 250. jonathan: you sounded less bullish. what is behind the? that? bob: that's a bit worrisome. we've 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 to what want to ride it? the next couple of quarters for sure. jonathan: 5.5% will not do it in

high-yield. will they keep going down? if you look at the capital structures, why be at the top of the stack? lisa: i get the point on equity, but i'm a fixed-income investor. you got to be somewhere. i like high-yield. you know what i like more? europe,in improving growth is great. thanks that have built of 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% when the venture cover. why not come down and capital structure? jonathan: cocoas have had a great year. more to go? lisa: i think it is the weight of money. think about where we are in terms of negative yields. you have a large sloth of the market trading get negative yields. probably about 18%. even if you look at the central banks starting to correct that policy, we have looked at

forward rates. may be in the worst case you have another 3% that is no longer negative. where people going to 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 become more constructive about europe. the economy has improved. want to think about how difficult it has been to push that positive asset classes stays europe, yields just low 30 basis point on the german 10-year, multiple expansion in the x p market. coco's have had a great year and maybe another one. bob: people have got it wrong. i will glorify you. u. have it -- horrify yoyu the total yield is 2.5%. toause when you swap it back dollars you are getting the yield of just over 5%. i look at that. i look at what i could do in the

dollar high-yield market of equivalent credit quality. advice will take some european we have had a german this rally in all asset classes for a while. the ecb is the one central bank that is telling us they may actually extent qe beyond when

they said the taper with end. they don't perceive raising interest rates in the near term future. minushink about the 4/10ths of 1%. jonathan: yet 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? they're not stepping up. lisa: think about those negative yielding assets. until that point happens you have to find a place to go to get positive yield. it is corporate credit. the other thing to carry on from that, thing about japan. japan has the been big story and continues to be the big story for us. japanese investors still can find value, be at less than it was over the past couple of years, but they can find value by buying u.s. corporate bonds, heading back into japanese yen. the year is 2018

they get away from the front and? bob: the growth looks wonderful in europe. it will put pressure on the ecb. i think you will see inflation direct of it higher on the core right in the 1.1% expectation. i don't know they will be able to do a continued qe in the last few months of the year. the focus by midyear will be one of the going to raise rates? bob michele and special thank you lisa coleman event of credit here. next up we focus on emerging markets. this is "bloomberg real yield." ♪

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jonathan: from the york city, jonathan ferro. this is "bloomberg real yield." at j.p. morgan asset management headquarters for the year that was in the year ahead. in 2017 it was definitely the year for emerging markets. am credit --em credit has ripped higher. with us is bob michele, global head of fixed income, and joining us is pierre-yves bareau , the head of emerging-market debt. -- oneu think about the of them was emerging markets. with rethinking thinking about this relationship between the united states and china, the potential for trade wars and the idea you want to stay clear in a big way. that was a bad call. what happened? pierre-yves: growth is good for em. when you look at history, it's

always good. it seems it is very conducive. growth is good. moderate inflation is good. commodities is in good shape in china is doing well. jonathan: that investors overestimate the impact of politics? pierre-yves: is something we need to care about in 2018. which it hasn't headwinds coming to em from politics. 40% of the country's will be going through political transition. 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. it wasn't about em. it was about elsewhere. bob: there was some of each and those statements. emerging-market debt pieces all year long. it had the high real yield when

he had zero real yields in the developed market. coming out of the trump victory, the emerging-market currencies were a bit undervalued. you can pick up high real yielding a tailwind. i think actually he did not get the trump stimulus. that was clear by the end of the first quarter. the dollar came off and emerging-market debt looks pretty attractive. jonathan: you have been a treasury -- for quite a while. the 10-year will not come through. bob: we go back and forth on this, don't we? as point to the 30-year rallying over 35 basis points this year. i can pinpoint the entirety -- it's up -- that the funding rate of the u.s. government, raising 30 basis point. it surprised us that yields in the long and have not gone up a bit more this year. i think certainly when there was a failure of the administration to figure of stimulus at the

start of the year we had a revised 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 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 bea andr -- a treasury bear and an em bull? bob: banks are being overly cautious and how they normalize policy. in the past two years they have been hiking with expectations. areong as central banks doing what they are doing, we have to keep an mind they have balanced the books a lot. jonathan: where do you have the most conviction around em?

in my debate emerging-market europe, eastern europe. latam not great, southeast asia very next. pierre-yves: we see big opportunities next year. we think high-yield it emerging-market. we are more or less away from the 10-year average. that is the value of trading our portfolio. we are targeting the countries where there is re-rating other countries. south africa and central america as well. the second opportunity is countries that are growth related. central europe and asia. it will be more of a challenge that here. carry will be less appealing. jonathan: in terms of the sector breakdown in credit, that a story is technology. technology in emerging markets is something people might not have valued enough. energy mining.

is that something you are focused on? lisa: pierre-yves: especially -- pierre-yves: that is why we are big in china. the reason why we think this solid inis much more terms of growth. one of the reasons is this industry upgrading. more than 50% of the cap asked in china is going to -- capex in china/ jonathan: there has been a bond route in china. why is that not let the em -- bled to em? pierre-yves: there is tightening, more defaults, everything that is good news because leveraging is finally happening. china is rebalancing into the newer sectors we were talking about. rebalancing from the supply model to a demand oriented model. consumption is now 70% of gdp growth in china.

better footing the people think. jonathan: i should be bearish on old economy china exposure? pierre-yves: china is a big factor for em. inmates is comfortable with em in general. not everything in em. we are coming to a tighter level right now. the big thing this year will be differentiation. one factor will be politics. you have the big value opportunities in local markets. a lot of countries are beyond -- the election will matter. assuming you share his confidence around emerging markets? bob: i do. i'm impressed with the way china policymakers have handled things. we want them to rein in credit of it. about how theyer snuck in a decorative rate hike on the yields 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 emerging-market debt. jonathan: they delivered a rate hike on christmas day as well. ,ob michele, pierre-yves 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. it is a flatter yield curve on the front and rally. bob give us the annual bond market awards next from j.p. morgan asset management. this is "bloomberg real yield." ♪

♪ from the new york city,, and jonathan ferro. this is "bloomberg real yield." it is time for the final spread.

coming up over the next week there will be a slur of u.s. economic data released. it will have bitcoin futures. we want the with that right now. eight boj decision, regional elections in catalonia, and all eyes in washington for a potential government shutdown. bob michele what i want to do with that's what i want to do with bob michele is something he does every year, the bond market awards. i think it is absolutely brilliant. we're going to rattle through them. you chose bond of the year. can you walk me through bond of the year? bob: and distorted markets you have to look for something that is most distorted. i went with the violia zeroes. eight bb -- a triple be rated issue. forget about the fact that money for three years. they actually got lender's to pay them money to take their

money. a yield of -3 basis points. and that is not a sign of distorted markets, i don't know what it. 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. he 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 the utility have not gone up in yield. i said we were going to have it. they should have. done they know growth is where it is accelerating? jonathan: is it going to happen next year? bob: certainly by this time next year because the distortion by

the central banks is not going to be there. central bank balance sheet expansion terms to contraction. jonathan: unsung hero? another good one. the yield curve. it has to be. the front end of the market went up and yield. if you're a short-term investor, looks great. anotherwhat about if you're a m investor? you made some money. jonathan: most valuable player of the year? i want to spend some time on this. bob: most valuable player, i want with quantitative ease. there is a number of ways to look at it. january1, 2017, we could've put all the sectors and asset classes on the wall, throw darts at them in the portfolio would have been up in value. january1,are we just good dar? the fact that central banks keep printing money, $160 billion a month. it ripples through. it means you don't get corrections.

that for 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? will the size of the balance sheet remain powerful? 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 the $20 billion a month in january, did steps of every quarter. we will see with 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 printed double come in and support bonds and then spillover into everything. jonathan: when we do this this time next year, the two-year in

germany will not be yielding -70 basis points? bob: i don't believe it will. jonathan: i special thanks to j.p. morgan asset management's bob michele, lisa coleman, and lisa coleman --and pierre-yves bareau. 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. this was "bloomberg real yield." this is bloomberg. ♪ is this a phone?

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