Systematic Credit and Equity G-255 Trading Indicators for August 28, 2025
What we do: Our trading model provides both high level and individual bond trading indicators that are used as risk management tools and for generating daily credit trades. This model produces 12,400 trade indicators daily, covering 6,200 bonds. The "Global 255" corporate issuer systematic credit trading research universe encompasses over 6,200 bonds representing $6.5 trillion in USD market capital. These bonds dominate the market, accounting for more than 75% the daily investment-grade (IG) corporate bond trades reported on TRACE.
Good morning, On Wednesday, we observed three significant earnings reports and two pieces of economic data that would typically influence equity, investment-grade (IG), and high-yield (HY) trading. However, with Labor Day approaching, trading volumes have been substantially lower. Coupled with numerous geopolitical headlines, this has led markets to largely overlook the earnings results from NVIDIA and RBC. Additionally, August retail sales and rail carload data (see page 2) indicate a slowing economy alongside accelerating retail prices.
On the fund flow front, ETF investment-grade (IG) credit saw robust inflows, while high-yield (HY) ETFs experienced modest inflows.
So despite fund inflows US credit valuations have dropped slightly, while non – US issuer USD credit is materially wider over the past week several reasons.
Key Headlines: Corporate Releveraging and Shareholder returns
NVIDIA (NVDA) reported a strong Q2, with projections for accelerated quarter-over-quarter (QoQ) revenue growth and approximately 50% year-over-year (YoY) earnings growth. The company has returned $24 billion to shareholders in 2025 through share repurchasing and dividends while improving balance sheet liquidity. Contrary to reports suggesting a slowdown in AI spending, NVIDIA's QoQ revenue growth guidance of $54 billion (versus $46.7 billion in Q2) exceeded analyst expectations, signaling continued growth acceleration.
Royal Bank of Canada (RY: A1/A, Attractive for Equity and Debt) Royal Bank of Canada's Q3 results surpassed expectations, with accelerated share repurchasing, increased dividend growth, and a maintained net cash position on its balance sheet. Net interest income and capital markets performance were particularly strong. (See pages 4 and 7 for earnings summary and trade indicators.)
As previously noted, major corporate issuers are releveraging their balance sheets at a record pace while returning significant cash to shareholders through dividends and share repurchasing.
Federal Reserve Independence Concern and Financial Bond Widening
President Trump's push to remove Federal Reserve Governor Lisa Cook has raised concerns about central bank independence, contributing to a weaker U.S. dollar and rising longer-dated bond yields. This has led to wider spreads in financial bonds this week, particularly among Yankee banks.
Financial Bonds widen led by Yankee Banks
USD-denominated Yankee bank bonds have faced selling pressure, with French banks widening by +9 basis points month-over-month at the 10-year level, though they remain unattractive for investment. Political uncertainty in France, including a government vote of confidence scheduled for September 8 and discussions of potential government dissolution, has added to market volatility.
Deutsche Bank (Baa1/BBB, DB 4.95 08/04/31) Deutsche Bank's New York bonds have widened alongside other European banks, reaching 103/5Y. Our trading model has re-entered this trade for the third time in three weeks. Despite Deutsche Bank's equity reaching a 12-year high, Goldman Sachs downgraded the stock on Wednesday due to valuation concerns.
U.S. Financial Bonds BBB/BB-rated U.S. financial bonds, including those of several U.S. regional banks, have widened in sympathy with Deutsche Bank and other Yankee bank credits. Issuer-specific indicators are provided below.
US Regional Bank Issuer Indicators August 27, 2025,
(1) 13 issuers: 9 de-levering or net cash balance sheets. 4 re-levering balance sheets.
(2) Sector has no net debt
(3) 345 bonds - $354 billion USD capital.
• 71% of Regional Bank Bond capital is rated single A
20% is rated BBB TMT
9% Perpetual Rate PFD.
(4) 49 Model trade Indicators
41 ($52 billion) is single A
7 ($8 billion) is BBB.
1 ($ 1 billion) a perp
(5) No significant long bond indicators
(6) Truist (TFC) and Fifth Third (FITB) are the most attractive short credit.
(7) 11 of 12 equity indicators are long but none are considered attractive at current prices.
LQD performance and model output
As noted on Tuesday, the LQD ETF is well-positioned to outperform due to spread widening in both U.S. and Yankee bank bonds. Despite a reported 25% short interest in the fund and our provision of long/short indicators for scenarios where the IG CDX trades tighter, the LQD indicator remains a long position, not a short.
Today's Systematic Trading Indicators
Big 6 subordinated bank Holdco (USD only)
USD Single A Industrial sector (USD only)
European Single A Energy (all currencies)
Are the top 3 short indicated sectors.
UK Banks (all currencies)
US BBB TMT (USD and EUR)
French Banks (all currencies)
Are the top 3 long indicated sectors.
USD Systematic Trading Model:
This morning's model indicators suggest credit will continue to tighten or rise in the near term.
Trading Allocation Strategy
50% Long: Undervalued, deleveraging bonds.
30% Short: Overvalued bonds in re-levering sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 144 long/short trades in 2025 (marked via TRACE), 92% achieved ±5 bp targets, averaging ±7.42 bp per trade. Between June 30 and August 25, 2025, 27 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Last week saw strong inflows into US corporate bond ETFs and mutual funds for investment-grade bonds.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, complying with global regulatory requirements for material events.
US Economic Indicators / Inflation and Interest rate outlook
Redbook same-store sales, rose 6.5% in the Aug. 23 week compared to a year earlier. Month-to-date sales through Aug. 23 rose 6.0%
August sales expected to be up 6.2% over the same month of the previous year
Johnson Redbook: "Most of the Trump administration's tariffs took effect at the beginning of August, leading to higher prices. As a result, shoppers - especially those with lower incomes - tend to seek bargains at large discount stores.
Total carloads for the week ending August 23 were 229,783 carloads, + .6% compared with the same week in 2024, while U.S. weekly intermodal volume was 282,550 containers and trailers, -1.9% compared to 2024.
This is consistent with the 15,000 retail store closures and the prospective retail price increases that have been announced by several of the large G – 255 retail/consumer issuers.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -15% below average
-G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 91% of top 100 issuer volume and 66% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -16% below average
-G-255 Issuers: 16 of the top 25 traded bonds accounted for 71% of top 25 issuer volume and 60% of total TRACE volume.
Market Movement
U.S. CDX Index: +.5 @ 50.2bp
U.S. IG Cash Spreads: Wider for a third day in the Yankee Bank space (as much as +4bp) and US fins were (+2bp) wider.
CDX HY Index: -.1 @ 107.4 (per Bloomberg).
HY Cash Bonds: Were unchanged on Wednesday.
High-Yield Activity
- Dealers bought $400mm of HY bonds Wednesday.
Most Bought HY Bonds
- DISH DBS (DISH Caa3/CCC- attractive short to attractive long)
Most Sold HY Bonds
- Charter Communication (CHTR Ba1/BBB- attractive long)
Investment-Grade Activity
- Dealers bought $500mm of IG bonds Wednesday.
Most Bought Sector: BBB TMT
- ATT (T Baa2/BBB attractive long)
- Broadcom (AVGO Baa1/BBB+ attractive long)
Most Sold Sector: UK Banks
- HSBC (A3/A- attractive long)
- Lloyds (LLOYDS, A3/BBB+ attractive long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, Single A rated global Autos, BBB TMT, BBB Energy, and Euro Yankee Banks. Overall model indicators 182 bonds ($276 billion) are considered undervalued by the stochastic credit trading model, with attractive 75 long trade indicators for the entire 6,000 USD bond universe.
Short Opportunities
1493 bonds ($1.54 trillion) are considered overvalued by the stochastic credit trading model with 911
short trade indicators for the entire 6,000 USD bond universe.
U.S. Big 6 Banks (All Ratings): $727.7 billion in overvalued market capital across 290 bonds, with 144 short indicators.
Single A Industrials: $109 billion, in overvalued market capital across 109 bonds, with 80 short indicators.
Single A and BB Energy $172 billion in overvalued market capital across 105 bonds, with 86 short indicators.
Single A Healthcare $169 billion in overvalued market capital across 116 bonds, with 82 short indicators.
Issuer News
None other than earnings announcements Wednesday.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 30% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: Our systematic credit trading indicator (IG and HY) remains overvalued. 140, (the most in the 34 year history of the trading model) of the world's 255 largest issuers of corporate debt, are adding leverage to their balance sheets.
While Front end USD credit spreads remain near all – time tight spreads, longer dated Moody's Baa credit spreads are only modestly tighter from April wide levels.
2025 10 - year credit spreads: are wider YoY and YTD.
UST 10Y rates are +39 bp higher YoY and -34 bp YTD
Global Equity Correlation to IG Credit Spreads
For the second consecutive trading day, U.S. IG credit spreads, HY prices and U.S. equity prices did not correlate owing to 2 separate credit events (see issuer news) and several proposed investments/actions by the US Government. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.
New USD G-255 supply and fund flow data
Net inflows to ETFs totaled $9.97b in the week ended Aug. 26, 2025, including the effect of leveraged funds, compared with $11.7b the prior week
Broad bond-market ETFs expanded by $228.7m to $4.11b
Corporate bond ETFs dropped by $1.25b to $1.56b
Investment-grade ETFs expanded by $220.6m to $7.05b,
High-yield ETFs dropped by $2.07b to $14.9m
Net inflows totaled $244.7b year-to-date
Based on inflows of $22 billion (Investment-Grade) and $1.5 billion (High-Yield), combined with $37 billion in G-255 bond retirements and $165 billion in coupon interest, net G-255 buying is expected to continue before the end of August.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 911, -80 from Wednesday AM. The systematic credit market indicator remains overvalued. The number of indicators = (+44% than the 200 day moving average.
Attractive long indicators: 75, unchanged from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-year maturities.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.
Replace Longs: Replace long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 70% long position hurdle is reached.
Current Status of trading indicators below:
In the past 41 days, 25 long trades reached their avoid trading levels and were replaced by 10 new issue and new short trade indicators.
Systematic Credit Trading Strategy August 25, 2025
Closed Positions: last week, the long/short basket trade exited 5 new issue trades. On Monday, the second Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 reached its avoid trading level.
Enter New Longs: Over the past 2 week, the model indicator added 6 new issues. With the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 widening to 103/5Y the trading model re-enters that trade for a third time.
3. Enter New Short trades: The trading model indicators show adding at least 3 new issue trades prior to adding any short trades.
4. Monitor Trade Position (Portfolio) Composition:
• Track the percentage of long positions relative to the total portfolio.
• If replacing the long positions that have reached their avoid trading level pushes the portfolio above the 70% long hurdle, initiate short positions in re-levering issuers (avoiding 7-year maturities) at a 1:1 ratio for any additional long positions.
5. Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic
6. Wednesday's Basket Trade long/ short ratio 58%
Systematic Credit Long/Short Basket Trade
The trading model uses predefined, back-tested processes driven by issuer data and market parameters, targeting ±5 basis points of spread movement in minimal trading days while minimizing volatility risk. The model employs only publicly available data.
Current Sample Systematic Basket bond trades based on trading strategy
On Wednesday, the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 secondary trade reached its avoid trading level. On Wednesday, the DB bonds traded +104/5Y. The trading model re-enters the DB secondary trade for a third time.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 27, 2025)
Total Trades: 148 (1% of total trades).
Performance Summary:
Long Indicators: 110/116 reached avoid-trading levels, tightening by -9.53 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 6 widened by 2.11 bp.
Remaining Shorts: 5 tightened by -16.74 bp.
Average Spread Movement: ±7.43 bp in the indicated direction.
Success Rate: 93% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.45 trading days) normal.
Canadian Bank Earnings on Wednesday
Royal Bank of Canada (RY, A1/A, attractive long) Earnings Summary: Royal Bank of Canada reported 3Q revenue that rose 14% YoY and earnings that rose 45% YoY.
Net interest income rose 3.75% YoY as loan charge-offs were 20% higher YoY.
Non-interest income rose +8% QoQ and +21% YoY.
Loans rose 2% YoY. Credit quality was improved slightly QoQ and declined YoY.
Company guidance is for 17% ROE in 4Q 2025.
Financial Position:
• Tier 1 capital at 13.2% v 13.2% at April 30, 2025, but up from 13.0% in 3Q 2024.
• Company did not use balance sheet to repurchase equity and pay dividends (CAD 5.2 billion) in 3Q 2025.
• Deposits rose by $35 billion QoQ, and $220 billion YoY to $1.481 Trillion.
• Balance sheet liquidity improved QoQ and fell slightly YoY.
• RBC has net cash on its balance sheet.
Dividends and share repurchases are growing at an annualized pace of 22% per annum.
Trading Model Indicator: 43 Bank of Royal Bank of Canada secondary bonds in circulation have a market capitalization of $850mm or more. 2 RY systematic trading model indicators are undervalued, while three bonds have long trade indicators. The RY 4.696 08/06/31 has the greatest spread tightening opportunity.
Equity Indicator: RY CN equity is attractive @ CAD 181.39 according to the systematic trading model.
National Bank of Canada (NACN, A2/BBB+, Avoid Long) Earnings Summary: National Bank of Canada reported 3Q revenue that rose 15% YoY and earnings that rose 3%.
Net interest income rose 1% YoY owing to expenses relating to the Canadian Western Bank acquisition
Non-interest income rose 10% YoY.
Loans were rose 21% YoY owing to the CWB purchase. Credit quality dropped -10bp YoY.
Company guidance is for 14% ROE for the year end 10/30/25.
Financial Position:
• Equity Tier 1 capital was 13.9% at June 30 vs. 13.4% at April 30, 2025.
• Total debt rose $250 mm QoQ and $2 billion YoY while net debt rose by $2 billion QoQ and 4 billion YoY
• Deposits grew by $14 billion QoQ and $81 billion YoY via acquisition.
• At present company is using balance sheet to repurchase shares and pay dividends and committed to a further 8mm share buyback.
Trading Model Indicator: There are 6 USD National Bank of Canada bonds in circulation that have a market capitalization of $750mm or more. None has a maturity of more than 4 years.
Equity Indicator: NA CN equity is a short trade at CAD 150 per share.
Disclaimer - This report is not intended as, and does not constitute an offer, or a solicitation to buy or sell any securities or financial instruments. All data, levels, opinions, and representations herein are provided for informational purposes only and should not be relied upon for making investment decisions. Past performance is not indicative of future results. The authors of this report assume no liability for losses or damages arising from the use of this information. Investors should consult with a qualified financial advisor before making any investment decisions. The information in this report is based on sources believed to be reliable, but no guarantee is made as to its accuracy, completeness, or timeliness.