Systematic Credit and Equity G-250 Trade Indicators for May 22, 2025
Good morning,
Yesterday, U.S. risk markets briefly grappled with concerns over government deficits and the willingness of non-U.S. investors—foreign banks, central banks, governments, and individual investors—who hold approximately 25–32% of U.S. capital stock (government bonds, corporate bonds, and U.S. Treasuries) to continue financing these markets.
However, the notion that U.S. or foreign investors, who have fueled the recent stock market rally, have suddenly "seen enough" and will withdraw their capital to focus on rating agencies, budget deficits, earnings reports, or economic data is dubious. Investors typically shift attention to fundamentals only after significant losses in U.S. capital markets, and we are far from that point.
Our systematic data analysis indicates that while non-U.S. entities are not actively pulling capital from U.S. markets, their commitment to U.S. investments, in dollar terms, has been declining since the Trump administration took office. To avoid political bias, note that the current budget deficit and the substantial cash reserves it financed are a shared responsibility of the first Trump and Biden administrations. Policies including 0% interest rates, multi-trillion-dollar PPP loan forgiveness, and four separate spending packages have shaped the U.S. government's current fiscal position. Excess cash in the U.S. monetary system now stands at approximately $11 trillion, down from $14 trillion in March 2022. At this rate, the U.S. economy might "grow into the deficit" over the next 20 years—provided borrowing is curtailed now. Wishful thinking, perhaps.
We rarely offer speculative opinions, but with a holiday weekend approaching in both the U.S. and London, it's hard to believe yesterday's market activity reflected a sudden, globally coordinated asset allocation shift.
Citibank's Banknote Offering
Citibank issued a banknote offering comprising four deals—2-year fixed and floating-rate notes (FRNs) and 5-year fixed and FRNs—all priced at attractive levels per our proprietary trading model. In the 36 years of running our stochastic trading model, this pricing marks a first. Historically, Citi has priced deals just inside attractive levels to deter flippers, but these levels were notably competitive.
This suggests either senior Citi syndicate managers were absent early for the holiday or the capital flow constraints we've frequently discussed are materializing. The offering's attractiveness underscores these dynamics.
Clarifying Bank Notes vs. TLAC Bonds
We observed that many dealers, salespeople, analysts, portfolio managers, and traders are unclear on the distinction between bank notes and bank holding company Total Loss-Absorbing Capacity (TLAC) bonds. Here's a brief overview:
Bank Notes (e.g., Citibank) Issued directly by the bank subject to US Federal Reserve limits on structure and issuance volume. Senior bank notes are direct obligations of the bank, equivalent to deposits, with no "bail-in" provisions, mandatory calls, or FRN options. All senior bank notes are bullet bonds.
Holdco Notes (e.g., Citigroup) Obligations of the bank holding company that owns the bank's equity. Typically TLAC or "bail-in" bonds. For example, a 5-year TLAC bond is structured as a 6-year non-callable 5 (6nc5). The holding company must redeem the bond at the 5-year call date or hold 100% reserves against the maturity in year 6, paying interest at SOFR + 350–400 basis points. TLAC bonds are usually called at the call date due to these reserve requirements.
TLAC bonds are priced 20–50 basis points wider than bank notes. Bank notes tighten more slowly because large banks (the Big 6 and major foreign bank holding companies) face regulatory limits on holding bank notes and competitor bank deposits.
Capital Flow Implications
The attractive pricing of Citibank's banknote offering was not accidental. It reflects a broader symptom of limited new capital entering US credit markets, aligning with our ongoing analysis of capital flow constraints.
Inflation Readings, Economic Data and Interest Rate Calls
This week's economic data, including the Leading Index and Philly Fed Non-Manufacturing surveys, reflect 35–40-year lows from an economic and inflation perspective, consistent with last week's University of Michigan survey. Despite these weak signals, markets remain largely indifferent. Comparable store sales from Walmart (WMT), Lowe's (LOW), Home Depot (HD), and TJ Maxx (TJX) reported disappointing results for the week ending May 17, 2025, yet the financial community continues to recommend these equities as buys.
Same-store sales rose 5.4% for the week ending May 17 compared to the prior year, with month-to-date sales up 5.6%. Approximately 80% of this growth is attributed to pricing rather than volume.
Despite a 15 basis point increase in 10-year US Treasury (UST) yields over the past five trading days, the 10-year UST remains the best-performing developed market government bond in 2025. Concurrently, the S&P 500 (SPX) gained 1.45% over the same period.
Earnings Season Insights
Lowe's (LOW) and Medtronic (MDT) reported earnings yesterday, revealing balance sheets with more supply than demand, driven by shareholder payouts. However, both companies issued notably cautious forward guidance on using debt capital for shareholder returns compared to the past decade.
BT (BT/A) reported weak topline numbers this morning, reinforcing the trend of underwhelming corporate performance.
We are closing in the "end of the regular season" where 229 of the world's largest issuers of corporate debt will have communicated earnings and guidance for the first quarter of calendar 2025. 7 of the world's largest corporates will report results over the month of June and then we will hear interim 2Q results from all but 7 (243) of the world's largest issuers of corporate debt beginning in the second week of July.
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Corporate Debt and Liquidity
As of May 21, 2025, 229 of the world's largest corporate debt issuers have reported Q1 2025 earnings and guidance. Seven more will report in June, followed by interim Q2 results from 243 issuers starting in the second week of July.
Corporate balance sheets remained flat quarter-on-quarter but added $1 trillion in net debt year-on-year. These issuers hold $10 trillion in available liquidity against $16 trillion in total debt. However, 22 of the world's largest banks, with $6.7 trillion in total debt, control 67% of this liquidity. Excluding non-US banks, particularly Japanese banks (which hold $1.9 trillion in liquidity against $1 trillion in debt), the corporate debt growth picture shifts significantly.
Excluding these non-US banks, corporate balance sheet debt is growing at an unsustainable 7–8% annual rate. This explains the underperformance of US corporate debt relative to other asset classes.
Over the next few weeks, we will provide more granular data to further analyze these trends and their implications for corporate debt markets.
Wednesday's US IG Credit Trading:
USD trading volumes were 9% below average. G250 issuer bonds accounted for 34 of the 40 corporates traded, representing 66% of Wednesday's volume on TRACE. Dealers purchased $1.25 billion of investment-grade (IG) credit, aligning with the daily norm for US IG credit trading. Financials comprised 36% of bonds traded, while Industrials were the only sector net purchased by end users, with Cummins Engine, Union Pacific (UNP), and Caterpillar Finance (CAT) being the most actively bought.
Market Movement
The US CDX index widened by 3.5 basis points to 58.5. US IG cash spreads remained unchanged to 5 basis points wider, with BBB and Energy sectors underperforming.
Attractive Trading Sectors
Long Opportunities: Selected new issues.
Short Opportunities: US Big 6 Banks, all ratings ($608.7 billion in overvalued market capital, 233 bonds, 35 short indicators).
Single A and BBB TMT ($283.7 billion in overvalued market capital, 163 bonds, 56 short indicators).
Single A and BBB Consumer ($153 billion in overvalued market capital, 111 bonds, 25 short indicators).
Issuer News Wednesday
ING Groep NV (INTNED): Exploring a US banking license to enhance dollar liquidity access and potentially tap Federal Reserve liquidity facilities.
AT&T (T): Agreed to acquire Lumen Technologies Inc.'s consumer fiber operations for $5.75 billion, expanding its broadband services in major cities. The deal, subject to regulatory approval, is expected to close in H1 2026.
U.S. IG Credit Valuation and Spreads
US investment-grade (IG) remains "slightly overvalued" but remains cheaper than its trading levels over the past two years. Credit spreads are closer to their 52-week widest levels (April 10, 2025) than to their 52-week and 5-year tightest levels (November 12, 2024). We are currently near the tightest US IG spread levels (February 22) for 2025.
Global Equity Correlation to IG Credit Spreads
Increased leverage on large US balance sheets, with approximately half allocated to shareholder returns, has caused a notable lag in the correlation between US equities (approximately +5% return year-over-year) and US IG credit spreads (approximately 25 basis points wider year-over-year).
New Supply / Bond Maturities / Credit Fund Outflows for May
Just 2 new G – 250 issues over $300mm on Wednesday. The aforementioned Citigroup (C) Citibank Bank Notes and 5 and 10Y new supply from BPCE Group which was priced just inside of our trading model's attractive levels.
.Thus far in May of 2025 37 of the world's largest corporate bond issuers have sold 91 USD denominated bonds totaling $86,575mm with $41,175 sold by Non Financial companies or 48% of the total
Systematic Trading Model Indicators and Trading Strategy - Thursday
The most significant long trading opportunities are now getting attractively priced new issues. Secondary long opportunities require wider spreads, and attractive short opportunities need tighter trading levels to be actionable.
Of the 334 bonds trading at extreme levels (long and short), the 357 attractive short trading indicators account for 76.6% of the total. However, the current number of short indicators is 44% below the historical average. Meanwhile, de-leveraging issuers, such as Siemens (SIEGR) and NatWest (NWG), and the Citigroup (C) bank notes have issued bonds at attractive levels for long positions.
Systematic Trading Strategy for Thursday May 22
The model advises selling long positions when they reach the "avoid trading" level and delaying larger short positions until the number of attractive short indicators reaches 400.
Long Positions
Focus on attractive bonds (or new supply) from issuers that have already reported earnings. For fixed-coupon bonds, prioritize issues with a size exceeding $1 billion.
Short Positions
Target 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
The Pfizer (A2/A) PFE 4.45 05/19/28 reached its avoid trading level Wednesday. The new Siemens (Aa3/AA-) SIEGR 5.8 05/28/55 and NatWest (A3/BBB+) NWG 5.115 05/23/31 are attractive new issues as model indicator we publish this AM.
Wednesday Sample Trading Indicators Credit Spread Movement
Since January 4 of this year we have published 106 trading indicators or about 1% of the total indicators from our systematic trading model.
• 58 of 79 attractive long indicators have reached their avoid-trading level and tightened by (-9.08bp) 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 (+2.90bp) on average.
• The remaining 3 short indicators credit spreads have tightened by (-2.66bp) on average.
• Across all 106 indicators, credit spread movement has been +/- 5.65 bp in the direction of the indicators.
Earnings reports from Yesterday
Medtronic (MDT, A3/A)
• Medtronic (MDT): Reported Q4 revenue growth of 3.9% to $8.9 billion and operating profit up 8% YoY. Medtronic projects 5% organic revenue growth for 2026 and reiterated its plan to spin off its Diabetes business as a standalone company. The company modestly raised its dividend by 1.4%.
• Financial Position: Medtronic returns over $6 billion annually to shareholders, with more than half through share repurchases. In most years, including 2025, Medtronic is cash flow negative, increasing net debt by $2 billion YoY to $22 billion.
• Model Trading Indicators: Medtronic has issued USD bonds only once in the past decade (2023). Of its bonds, only three have market capital exceeding $1 billion, and none are deemed overvalued by our trading model. However, Medtronic equity is considered attractive at last night's trading levels.
Lowe's (LOW, Baa1/BBB+)
• Lowe's (LOW): Reported Q1 comparable store sales down 1.7% and overall revenue down 2% YoY. Free cash flow fell 28% YoY to $2.8 billion. US comparable sales rose 0.2%, with total sales growth of 2.8%. The company opened 13 new stores, but earnings declined 3% YoY to $2.8 billion.
• Financial Position: Historically, Lowe's has prioritized debt capital availability over cost (as a BBB-rated borrower). Over the past decade, shareholder returns grew 12.9% annually, with LOW equity averaging a 15% annual return. Net debt increased from $13 billion to $34 billion over this period. Since FY2023, Lowe's has adopted greater financial discipline, slowing share repurchases and cash burn while maintaining dividend growth (+15% annually over the past 5 years). The company was cash flow negative until this year.
• Model Trading Indicators: None of Lowe's 26 liquid USD-denominated bonds are considered attractive for long positions or undervalued by our trading model. Given negative comparable store sales, LOW equity is not viewed as an attractive long or short trading opportunity at last night's closing price.
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.