G-255 USD New Issue Supply with Trading Indicators Explained
Good Morning
Each day when any of the world's largest 255 issuers (minimum of $15 equivalent debt outstanding) of corporate debt market new USD supply, We run the proposed new bonds through our systematic credit trading model to get "Initial new supply trading indicators"
We distribute these indicators between 10:30 and 11:30 AM
The new supply trade "Trading Model Indicator"
provides the offering level that the model algorithm has calculated will ensure (with an 87.5% confidence level) a (-5bp) or better spread tightening within 23 trading days of initial pricing.
The model indicator is based on:
(1) Reported balance sheet leverage direction;
(2) Prior night Credit Curve trading levels by tenor,
(3) Credit rating,
(4) Use of proceeds,
(5) Definition of "on the run" tenors for existing bond.
(6) Trading sector algorithm.
(7) 22 trading day average trading period.
Once the new deal has been priced we create the report provided below.
The trading indicator listed in the daily G–255 trading post pricing is the model's valuation of the individual bond relative to the existing trading curve of the underlying issuer. Using the Wells Fargo (WFC A2/BBB+) trading example, the announcement of the WFC 4nc3 fixed supply created a trading indicator that showed if the new 4nc3 was priced at 65/3Y, there was an 87.5% probability that the new bond would trade (at a minimum) to 60/3Y within the next 22-day trading period.
Once the WFC 4nc3 deal was priced, we ran the new bond through our trading model a second time. The model indicator showed that 60/3Y was still the tightest trading spread that the model could create an 87.5% confidence level.
How many of the new indicators hit their avoid point in 22 days? A: About 92%.
New USD G-255 New issue indicator performance
Shown below are final G – 255 USD trade indicators for new supply on September 2.
Of the 37 bonds issued last Tuesday ($32.75 billion), 15 have already reached their avoid trading level (highlighted in yellow).
Another 6 bonds are trading within (-3 bp) of their avoid trading level.
Just 1 bond—Nomura (Baa2/BBB-) subordinated NOMURA 5.043 06/10/36—is trading significantly behind the new issue spread.
7Y maturities were the best performing new issues.
10Y maturities were the poorest performing new issues from last Tuesday.
Finally, the systematic trading model is a "trading model"; hence, it generated trade indicators twice per day. When a new bond from an underlying issuer that is reducing net debt backs up in price or spread, the model output will create additional long trading indicators to add to that position.
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.