Systematic Credit and Equity G-250 Trading Indicators for May 19, 2025

AA rated and solid as a …

Good Morning: So the trading question is whether Friday's Moody's downgrade will impact risk trading today and going forward. Did the trading model have an attractive short trading indicator on USTs? A: Yes. Issuer was releveraging and the debt was tighter on the year.

We read a number of mixed messages from the financial press about the impact of tariffs, the US budget, and poor reaction from the globe's largest issuers of corporate debt.

First, Republican White Houses have historically been far less fiscally responsible than Democrats. But that's not why the US rating was downgraded. Does the downgrade help asset allocation decisions away from the US dollar and issuance of US corporate debt? Yes, and we have already documented that.

Second, the tariffs are an issuer-by-issuer phenomenon. I could literally repeat all 211 outlooks from each issuer, and there is no trend whatsoever. Individual management's ability to create business and capital strategies to deal with the tariffs is the order of the day. US earnings outlooks overall are the same as the ROW. But if you pull out the tech issuers from that equation, US earnings outlooks are not as strong as non-US issuers going forward.

As for credit trading and credit spreads: USD volumes are depressed. Away from the Big 6 banks, the world's largest 244 issuers of debt are raising just 54% of their capital in USDs. That's a 10-year low. Large US issuers are borrowing materially more ($350 billion more) than their non-US competitors. 50% of the extra borrowing is funding about $600 billion of dividends and share repurchases. The excess borrowing is leading to a much lower correlation between US equity prices (which are higher on the year) and US credit spreads (which are (+15bp) wider on the year).

Still, our trading model is indicating its most overvalued reading since mid-February.

We have never seen the market react adversely to prior US credit downgrades. As to whether today is a different story? We have no idea.

Inflation Readings and Interest Rate Calls

Michigan Consumer Sentiment for May came in at 50.8, the second lowest on record. The outlook was almost worse @ 46.5, which is the worst since 1980. 5-year inflation expectations are now @ 4.6%, and 1-year inflation expectations are @ 7.3%, the highest since 1981.

Thus far, 2025 CPI and PPI do not reflect any of those expectations. Neither does the UST complex, US equity prices, or US credit spreads.

The Fed has 2 meetings in the next 5 months (June 18 and July 30). Unless the PPI and CPI data we saw for April continue into May and June readings AND initial jobless claims (which correlate strongest to the US reported unemployment rate) rise, historically speaking, the inflation and employment data would not support a Fed rate cut. That would leave 3 more meetings for 2 rate cuts.

The US 10Y remains (-9bp) lower in yield (4478%) YTD.

Earnings Season

211 of 228 issuers that will report interim results for the March–June period (which have issued $15 billion of hard currency debt, $22 trillion overall) have provided their income statement and balance sheet data.

1. Overall balance sheet liquidity is higher QoQ by $64 billion (+0.41%), but net debt is $1 trillion higher (+6.5%) YoY.

1. Balance sheet movement at US banks has seen net debt rise by $132 billion QoQ and $410 billion YoY due to the movement of assets out of cash into investment and trading assets. Conversely, 34 non-US banks moved deposits and trading assets into cash and ST investments (and paid down $18 billion of debt), and net debt dropped by -$309 billion QoQ but is still $353 billion higher YoY. 156 global non-financial issuers added $112 billion of net debt (+1.8%) QoQ and by $237 billion YoY (+5.25%) while paying over $500 billion in dividends and buying back stock

3. We will see how bank cash and balance sheets stand starting next week when Canadian banks report results through April 2025.

4. Either revenue growth will need to accelerate, or non-financial balance sheets will begin to deteriorate if those issuers continue the pace of returns to shareholders.

Friday's US IG Credit Trading:

USD trading volumes were -12% below normal on Friday. In the past month, we have only had 1 materially above-normal trading day (April 30) and 8 materially below-average trading volume days. This owes to the lack of non-US demand for USD corporate bonds. Trading levels on Friday were below average for every hour with the exception of the 10am–11am hours. General Motors (GM), United Healthcare (UNH), and Bank of America (BAC) were the most bought issuer bonds on Friday as end users bought over $1 billion net. We saw high activity in Charter Communications (CHTR) and Cox Communications due to the potential buyout of the latter. Charter was slightly wider on 250% higher trading volume than normal.

US CDX was unchanged @ 55bp, while US IG cash was again unchanged to (-4bp) tighter as US financials again outperformed. TMT was a clear underperformer.

Attractive trading sectors

Attractive Long Trading Sectors: Single A and BBB UK Banks ($107 billion of market capital/43 bonds), Single A and BBB TMT ($118 billion of market capital/59 bonds). .

Attractive Short Trading Sectors: US Big 6 banks all ratings ($608.8 billion of overvalued market capital/231 bonds), Single A and BBB TMT ($265.05 billion of overvalued market capital/182 bonds), Single A and BBB Consumer ($132 billion of overvalued market cap/102 bonds).

For more details on each trading sector or individual secondary trading curve, please reach out.

Issuer News Over the weekend

Deutsche Bank (DB) announced a further share buyback for the second half of the year, on top of a €750 million repurchase program started in April.

Capital One (COF): Capital One NA and 360 Savings account holders agreed to settle for $425 million in federal litigation over the advertising of interest rates, according to a Friday court filing.

Charter Communications (CHTR) has agreed to combine with Cox Communications in a cash-and-stock deal valued at about $34.5 billion, including debt.

U.S. IG Credit Valuation

US investment-grade (IG) credit remains "Slightly overvalued" which is far cheaper than where US IG credit has traded over the past 2 years .

US credit spreads widened by +75 bp from November 12, 2024, when our trading model generated 1,121 attractive short trading indicators ($1.903 trillion) to April 10, 2025, when the model produced 828 attractive long indicators ($1.514 trillion). Since April 10, 2025, US spreads are roughly +22 bp tighter in both BBB and single-A rated credit.

Systematic trading captures volatility trading points and produces significantly higher reward/risk results metrics in an automated analytic and trading process. By adding long and short trades incrementally as the model output indicates daily and exiting trades at the model avoid points, much of the credit market volatility and exposure is limited.

Global Equity Correlation to IG Credit Spreads

Friday, we noted John Deere (DE) equity vs. its 10Y credit spread.

General Motors (GM) equity is up +11% YoY, GM 10Y credit spreads are getting back to unchanged.

Pepsico (PEP) equity is down (-27%) YoY, PEP 10Y credit spreads are (-2bp) tighter YoY.

We have noted that while overall USD 10Y credit spreads have correlated to US equity index price movement, balance sheet leverage is growing to fund shareholder returns. Weak US fund flows and foreign buying have been buffeted by $108 billion of bond maturities in G-250 issues over the past 30 days. Overall, US credit spreads have trailed US equity movement in 2025.

New Supply / Bond Maturities / Credit Fund outflows for May

Short and intermediate investment-grade bonds: $1.86b inflow vs. $113.8m outflow. April's $28.4b of outflows were the most since May 2022.

Since the beginning of earnings season (April 14, 2025), 26 G-250 issuers have sold 62 deals for €67.5 billion.

At the same time, US Big 6 banks have raised $41.35 billion in 9 separate USD transactions (21 separate bonds). 38 other G-250 issuers have raised $85.5 billion in 101 separate offerings.

We also have seen almost $150 billion in G-250 bond redemptions since April 14. This has provided significant monetary support for current US credit spread tightening.

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Systematic Trading Model Indicators and Trading Strategy - Monday

We have now seen over 213 of the world's largest 250 corporate bond issuer balance sheets for the period ended 3/31/25. While 113 are adding balance sheet debt, the amount of eligible USD trading debt where the underlying issuer is releveraging is $3.15 trillion, while the amount of eligible trading debt where the underlying issuer is deleveraging is $2.8 trillion.

The largest long trading opportunities are in TMT and UK and European banks. The largest short trading opportunities are in BBB Auto, Single A and BBB industrials, and Big 6 banks.

Systematic Trading Strategy for Monday May 19

The 261 attractive short trading indicators generated by our trading model is the most since Feb 27. At the same time, the 200-day moving average number of short indicators stands @ 437. Hence, shorting bonds at current levels is not indicated by our trading model.

The 77 attractive long indicators are the fewest since February 20 and 47 fewer than the 200-day moving average.

The model indicates selling long positions that reach its avoid trading level and holding off on a larger attractive short position until the number of attractive short trading indicators hits 400.

Long Positions: Attractive bonds (or new supply) from issuers that have already reported results. However, an issue size above $1 billion is the sole indicator for fixed-coupon bonds.

Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet.

Systematic Credit indicators

Systematic credit trading employs defined back-tested trading processes and portfolio construction algorithms based on issuer reported and market trading parameters. This clarity differentiates them from discretionary approaches, offering replicable and auditable methods. We target ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.

Most Recent Model Trading indicators

Friday Sample Trading indicator Credit Spread Movement

• 55 of 76 attractive long indicators have reached their avoid-trading level and tightened by (-9.1bp) on average

• 24 of 27 attractive short trading indicators have reached their avoid-trading level and widened by (+5.3 bp) on average.

• The remaining 21 long indicators credit spreads have widened by (+4.1bp) on average.

• Across all 124 indicators, credit spread movement has been +/- 5.25 bp in the direction of the those indicated.

Earnings reports from last week

Takeda (TACHEM, Baa1/BBB+)

• Similar to other Japanese companies, it doesn't release 4Q results, just YE numbers. By deduction, 4Q revenue rose 6% to ¥4.6 trillion, while 4Q operating loss was 32% higher at -¥104 billion. Management raised guidance for 2026 by 10% YoY and raised the dividend by 4%.

• Financial Position: Company continues to pare balance sheet by (-¥200 billion) while raising the dividend.

• Model Trading Indicators: Last year's $3 billion 4-tranche TACHEM deal was their first US offering in 4 years. The model sees the TACHEM 5 1/4 06/23/45 and TACHEM 3.175 07/09/50 as undervalued, but none of the 13 Takeda USD secondary bonds are considered an attractive long indicator at current levels. The model does see 4502 JT equity as attractive at Friday's closing level.

Teva Pharmaceutical (TEVA, Ba2/BB-)

• Teva filed its 10-Q last week.

• Financial Position: Teva's balance sheet continues to improve. Net debt is down by (-30%) over the past 4 years to just under $17 billion.

• Model Trading Indicators: Teva has only sold debt once in the past 4 years, raising $900 million in 2023. Our trading model still sees the TEVA 6.15 02/01/36 and TEVA 4.1 10/01/46 as attractive long trading indicators. The model also sees TEVA equity as attractive at Friday's closing price.

Energy Transfer (ET, Baa2/BBB)

• ET filed its 10Q last week.

• Financial Position: Post-WTG Midstream Holdings acquisition, the company still has not started to pay down debt. ET net debt is now approaching $60 billion.

• Model Trading Indicators: Our credit trading model views 16 of the current 35 USD ET secondary bonds as overvalued at current levels, but none are attractive short trading indicators, with approximately (-5bp) still needed to reach that valuation level. Our trading model views ET equity as attractive at Friday's closing price.

Berkshire Energy (BRKHEC, A3/A-)

• Berkshire Energy 1Q revenue of $6.4 billion, up 4%. Operating income rose 65% owing to increased pricing and higher utilization rates in the quarter. BRKHEC did not make any distributions to the parent in 1Q 2025.

• Financial Position: BRKHEC is the third largest utility holding company in the US. Describing each individual company's balance sheet in one sentence is not possible. BRKHEC is releveraging its $60 billion balance sheet.

• Model Trading Indicators: There are over 50 BRKHEC liquid USD secondary bonds. At current trading levels, however, our model sees just 3 as overvalued: Pacificorp (A2/A) BRKHEC 5.45 02/15/34, Berkshire Hathaway Energy (A3/A-) BRKHEC 6 1/8 04/01/36, and BRKHEC 3.7 07/15/30.

Telefonica (TELEFO, Baa3/BBB-)

• Telefonica 1Q revenue fell 5.32%, and EBITDA was roughly flat YoY @ €3 billion, reporting a sizable (-€1.2 billion) after-tax loss owing to Latin American write-offs. Company expects 2025 free cash flow to be flat with the €2.6 billion reported in 2024.

• Financial Position: Net debt on the TELEFO balance sheet has been coming down steadily for the past 3 years. The €28.3 billion at the end of Q1 was down (-2.5%) QoQ and 7% YoY.

• Model Trading Indicators: There are only 8 remaining TELEFO USD bonds in circulation. The company has not sold USD debt since 2019. The TELEFO 7.045 06/20/36 is undervalued according to our trading model. The model does not see TEF SP equity as attractive at current trading levels.

Softbank (SOFTBK, Ba3/BB+)

• Softbank reported 4Q net income of ¥517.18 billion on net sales of ¥1.94 trillion; the company had a -¥108.11 billion in 4Q 2024 (2 estimates). Vision Funds segment profit was 26.07 billion yen vs. a loss of 96.74 billion yen YoY.

• Financial Position: The company proposed a year-end dividend of JPY22 per share, bringing the full-year payout to JPY44, unchanged from the prior year. For financial 2026, SoftBank forecasts another JPY44 per share dividend. Balance sheet continues to relever.

• Model Trading Indicators: There are only 9 remaining SOFTBK USD bonds in circulation. Our credit trading model sees the SOFTBK 4 5/8 07/06/28 and the SOFTBK 5 1/4 07/06/31 as attractive short trading indicators. The model does not see 9984 JT equity as an attractive short or long at current trading levels.

Tencent (TENCNT, A1/A+)

• Tencent reported 1Q revenue RMB180.0 billion ($25.1 billion), up 13% over the first quarter of 2024. Gross profit was RMB100.5 billion, up 20% YoY. Operating profit was RMB69.3 billion, up 18% YoY. Operating margin increased to 39% from 37% last year.

• Financial Position: Cash was RMB476.0 billion, and free cash flow was RMB47.1 billion, down 9% YoY. Net cash position totaled RMB90.2 billion (USD12.6 billion). Balance sheet continues to relever. Tencent plans to buy back at least HK$80 billion of shares and proposed to increase its annual dividend 32%.

• Model Trading Indicators: There are 10 Tencent Holdings USD bonds in circulation. Our trading model views TENCNT 2.39 06/03/30 and the TENCNT 3.94 04/22/61 as attractive short trading indicators, with 4 other bonds considered overvalued. Our trading model does not consider HK 700 equity as an attractive long at current trading levels.

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.