The model explained

There are days when a broker/dealer or investment managers will state "The market was unchanged" and simply use the phrase to move on to other endeavors. And then there are days where the markets are truly unchanged. On Wednesday the markets were truly unchanged.

We saw strong results from Bank of Nova Scotia (BNS), Royal Bank of Canada (RY) and National Bank of Canada (CN) on Tuesday and Wednesday.

Key Take Aways From Tuesday/Wednesday Canadian Bank 4Q reported earnings

Net interest margin continues to improve even as overall bank credit is trending toward more NPAs. CET1 capital is growing along with deposits and non-interest income.

With Toronto-Dominion (TD), Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce (CM) still to report, year-end results for half the Canadian bank sector bode well for 4Q results in the 19 US banks in the G-255 trading universe.

Two other components will be shown both today and tomorrow.

Revenue for Canadian banks is accelerating. The Canadian banks are adding debt to repatriate more money to shareholders. Share repurchases for Canadian banks have been highly successful. Canadian bank equities are up almost 15% YTD while ROE and capital are rising.

Will US banks follow in line with Canadian banks?

A: We're not in the prognostication business. The model indicators use only publicly available information. However, Canadian and US banks operate similar businesses in similar regions. What we can discern thus far is that lower interest rates in Canada did not impact net interest income.

The same cannot be said for European bank results thus far in 2025. The largest difference between Euro banks and Canadian banks is the amount of actual banking/investment-bank revenue derived locally versus internationally.

Clearly the Canadian banks' US asset mix has helped 2025 reported results thus far.

All of the Canadian bank share prices are at levels well above attractive entry points.

There are only 7 Canadian bank corporate bonds that the trading model indicators show as undervalued.

The Canadian bank reports, however, are perceived as positives for both the US equity and credit markets.

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G-255 Credit Trading Sector Indicators and Wednesday Credit Trading

Weak ETF inflows for the 7-day period ended Dec 1 and the worst ADP jobs report in years leave model percentage trade indicators unchanged for a 30th consecutive trading day. We have not yet seen sufficient movement in valuations (equities or credit) or in incoming/outgoing ETF and mutual fund flows to trigger a new trading allocation from the model.

• Top traded IG G – 255 issuer: Merck (Aa3/A+ long credit/long equity) unchanged to (-1bp) Wednesday

• Top Traded HY G – 255 issuer: Petroleos Mexicanos (PEMEX B1/BBB long credit) (-2 to -10bp) Wednesday

Key Trading indicator economic results:

• Total carloads for the week ending November 29 were 197,955 carloads, +4.3% percent compared with the same week in 2024, while

• U.S. weekly intermodal volume was 233,480 containers and trailers, -6.5%.

• Private-sector payrolls decreased by 32,000, with companies with fewer than 50 employees shedding 120,000 jobs, the largest one-month decline since May 2020 according to ADP.

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G-255 Credit Market Valuation and New G – 255 Supply December 4

On a Risk/Reward basis, High Yield bonds have far outperformed Investment Grade in 2025

• UST 10-Year Rates: Down -9.9 basis points (bp) year-over-year (YoY) and -48.8 bp year-to-date (YTD). Spreads reached their tightest point of the year on Friday, February 21, 2025, and widest on Thursday, April 10, 2025.

• Despite the U.S. Fed funds rate declining 150 bp over the past 12 months, 10-year UST rates have fallen only 10 bp YoY, while 5-year UST rates are down 41 bp YoY. This muted decline in longer-duration UST rates has driven overall credit spreads wider in 2025.

Bloomberg 10Y credit spreads are derived by taking the Moody's index yield and subtracting the UST 10Y YTM.

Just 2 of the 4 new G-255 USD offerings launched on Wednesday were Investment Grade. Given the weakness of inflow into the HY market and the time of year Celanese (CE, B2/BB-rated long credit/equity), Citigroup (C , Ba1/BB+ long credit /equity) both priced new deals at significant discount to secondary trading levels.

AEP (Baa3/BBB, short credit/long equity) most unusually tapped subordinated bonds that had been priced too tight in September and re-offered new debt +25 bp and +30 bp cheap to the same bonds sold in September.

Deutsche Bank (DB, A1/A, long credit/equity) sold USD Senior Preferred for the first time in 4 years. Oddly enough, it priced a 5Y bond –13 bp through a Senior Non-Preferred 6NC5 security priced in September. The SNP traded out +1 bp to its September new-issue price after the new deal.

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Four additional November 2025 new G-255 issues, plus one FRN from July, have hit their model-defined avoid levels. Across all G-255 new issues, 87% of indicators have delivered an average return of just under –8 bp over a 33-day holding period. In 2025, 933 of 1,077 bonds issued ($1.119 trillion notional) have triggered avoid signals.

Broad bond-market ETFs saw outflows of $2.57 billion (AUM now $3.32 billion).

• Dedicated Investment Grade corporate bond ETFs had net inflows of +$509 million (vs +$621 million last week).

• Dedicated High Yield corporate ETFs had net outflows of –$284.74 million (vs inflows of +$1.14 billion last week).

G-255 Credit and Equity Market Indicators December 4

• Attractive Long Credit Indicators: 73, (-7 from Wednesday and -24% below the 200-day moving average of all long indicators).

• Attractive Long Credit Market Cap accounts for: 38% of all undervalued Systematic Credit capital.

• Attractive Short Credit Indicators 819, (+6 from Wednesday and +62% above the 200-day moving average of all model short trade indicators).

• Attractive Short Credit Market Cap accounts for: 55% of all overvalued Systematic Credit capital.

G-255 Equity Trade Indicators and US Equity Correlation to Overall US Credit Spreads

US equities and credit markets moved in identical directions Wednesday while equities as US credit is now tighter over the past 2 weeks. The two markets have directionally correlated in 10 of the past 14 trading days.

• US equities are unchanged over the past month, US credit spreads are now slightly wider MoM.

• 2025 is on track for the second-weakest year in 32 for USD credit-equity correlated movement—historic 80% vs. ~74% this year.

Systematic Equity Trading Indicators December 4

• Attractive Long G-255 Equity Trade Indicators: 63 (includes both undervalued and equities priced at

extreme discount (+2 from Wednesday and +5% the 200-day moving average of all long trade indicators).

• Attractive Short Equity Trade Indicators 8, (-1 from Wednesday) and -11% to the 200-day moving average of all model short trade indicators).

• Why are G-255 equity issues outperforming the S&P and Dow? A: Over 30% of the 242 publicly traded G -255 equities have already reached their 2025 low price and 40% of the G-255 issuers are non – US corporates.

• G-255 issuers are returning more capital to shareholders (via dividend growth and share repurchase) than S&P issuers as a whole.

Highest ranked equity long indicators on Wednesday:

Meta Platforms Inc (META) Comcast Corp (CMCSA) Walt Disney Co/The (DIS)

Oracle Corp (ORCL) T-Mobile US Inc (TMUS) Home Depot (HD)

Carnival Cruise (CCL) Royal Caribbean (RCL) American Tower (AMT)

ATT (T) Altria (MO)

• Equities leaving highest ranked long indicators on Wednesday:

Deutsche Telekom AG (DTE GY)

G -255 Issuer News on Wednesday

The European Union is preparing to open a full-scale antitrust investigation into Meta Platforms Inc (META AA3/AA- long credit/equity) over its AI features in WhatsApp.

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G-255 Specific Credit Sector Indicators December 4

Long Opportunities:

Focus on de-leveraging issuers, including Single A and BBB-rated TMT, UK Banks, US Regional Banks, and Floating Rate Notes.

• Valuation Insight: The stochastic credit trading model identifies 194 undervalued bonds ($329 billion market

value), with 73 long trade indicators across the 6,000-bond USD universe.

• At present only Single A rated TMT, BBB rated TMT, BB rated TMT and US Regional Bank sectors have 10+ long individual bond trade indicators.

Short Opportunities

• 1,549 bonds ($2.714 trillion) are overvalued per the stochastic credit trading model, with 813 short trade indicators.

• U.S. Big 6 Banks (all ratings): No longer a short indicator as of 10/22. +6 to +14 bp 9/22 – 10/22

• Single A and BB Energy: No longer a short indicator as of 10/27. Bonds +6 to +14 bp 9/27 -10/27

• Single A Healthcare: No longer a short indicator as of 10/22. Bonds +5.5 to +13 bp 9/22 – 10/22

• Single A Industrials: No longer a short indicator as of 10/22. Bonds +6.5 to +15 bp 9/22 -10/22

• Autos: 153 bonds ($164.8 billion) are overvalued, with 113 short trade indicators

Systematic Portfolio Daily Trading Model Indicators

• Long Indicators: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.

• Short Indicators: Target releveraging issuers trading at the deepest discount from their model avoid point, avoiding 7-year maturities due to low attractiveness.

• Replace Longs: Swap long positions that have reached their avoid trading level.

• Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 67.5% long position threshold is reached.

• Current Status: Add new supply trades where the issuer is deleveraging; add new issue bonds where spreads widened by +2 basis points.

• Current Status of Trading Indicators: Last week, one short trade and two long trades reached their avoid trading level. The trading model added three long indicators.

Monitor Trade Position Composition:

• Track the percentage of long positions relative to the total portfolio.

• If replacing long positions that have reached their avoid trading level pushes the portfolio above the 65% long hurdle, initiate short positions in releveraging issuers (avoiding 7-year maturities) at a 1:1 ratio for additional long positions.

• Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic strategy.

• Look for individual bond indicators to change overnight: Historic trading levels are leading to overnight adjustments to long, short and avoid indicator levels.

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G-255 Specific Bond Trading Indicators December 4

• Closed Positions: The Cigna (Baa1/A-) CI 2.4 03/15/30 (short) and Amazon (A1/AA) AMZN 4.35 03/20/33 (long) both reached their avoid trading levels Wednesday November 19. The Truist Bank (Bank Sub A3/A-) TFC 2 ¼ 3/11/30 short trade indicator reached its avoid trading level on Monday November 21. The General Motors (Baa2/BBB) GM 3.6 06/21/30 short trade indicator reached its avoid trading level on Monday 11/24.

• Enter New Longs: The trading model added Meta (AA3/ AA-) META 4 7/8 11/15/35 and META 5 1/2 11/15/45 new supply long trade indicators on 11/7. The new Amazon (A1/AA) AMZN 4.35 03/20/33 was added to the Model Trade on Monday 11/17. On Tuesday December 2, the Florida Power & Light (Aa2/A+) NEE 5.6 02/15/66 and on Wednesday December 3, Celanese (Ba2/BB+) CE 7 02/15/31 were added as new issue long indicators.

• Enter New Short Trades: The trading model added General Motors (Baa2/BBB) GM 3.6 06/21/30 as a short trade on Monday 11/17. The trading model added BP (A2/A) BPLN 4.893 09/11/33 as a short trade on Thursday 11/20, the Toyota (A2/A) TOYOTA 4.8 01/05/34 Monday 11/21 and the CVS (Baa3/BBB) CVS 1 3/4 08/21/30 on Monday 11/24

Current Sample Systematic Basket bond trades based on trading strategy December 3

Systematic Trading Indicators Wednesday: Trading model added Celanese (Ba2/BB+) CE 7 02/15/31 as a new issue long.
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G-255 Credit Basket Trade Statistics

Tuesday's Basket Trade Long/Short Ratio: 72%

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – December 3, 2025)

Performance Summary: Total Trades: 190 (1% of total trade indicators).

• Long Indicators: 126/145 reached avoid-trading levels, tightening by -9.2 bp.

• Short Indicators: 36/44 reached avoid-trading levels, widening by +5.85 bp.

• Remaining Longs: 20 widened by +.63 bp.

• Remaining Shorts: 8 tightened by -14.68 bp.

• Average Spread Movement: ± 6.54 bp in the indicated direction.

• Success Rate: 86% of indicators reached avoid-trading levels, which is slightly below normal.

• Average trade holding period: 23 days (above average)

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.