Systematic Credit and Equity G-255 Trading Indicators for August 19, 2025
Good morning! Monday's substantial new supply calendar, featuring Eli Lilly (LLY), Charter Communications (CHTR), and McDonald's (MCD), all hit the market, with trading volume near normal despite "Jackson Hole week" and the upcoming UK August holiday next Monday. S&P affirmed the US AA+ credit rating with questionable budget estimates. As previously noted, we're in the fourth inning of the tariff game, and based on BHP's comments (see earnings write-up below), it's unclear where S&P, Bloomberg, and CNBC source their information or assumptions. Tariff-related price changes are expected within the next three months.
Forecasting what the market is "discounting" remains confusing. The market isn't reflecting actual earnings results or forecasts, nor is it accounting for rising US inflation expectations and elevated cost inputs and prices received in regional Federal Reserve data, which have yet to appear in national CPI data. This will likely make Jackson Hole remarks even more perplexing.
Historically, US equity prices are at all-time highs, but valuations are not, according to various equity earnings data services. However, the S&P 500's price-to-book ratio (5.6) is at a record high, driven largely by over $1.7 trillion in equity repurchasing by US corporations in 2025 at or near peak levels.
Additionally, 7-year and shorter USD credit spreads are at or near historic tights.
Last night, our systematic credit trading model signaled "extremely overvalued" for the first time in 10 months, which is typical. A significant spread-widening period is expected within the next 44 trading days, though not in the coming week.
For credit spreads to widen and high-yield (HY) prices to decline, the model relies on three key data hierarchies: (1) Balance sheet leverage, (2) Retail credit fund flows, and (3) Equity price depreciation. These are detailed in our daily reports. While balance sheet debt for the 255 largest bond issuers continues to rise and 2–7-year bond spreads are at historic tights, credit fund flows remain strongly positive, and global equity prices continue to climb.
How to Prepare for the Impending Spread Widening and HY Price Decline (2)
Sector Selection
a. For long/short: Identify sectors to short.
b. For long-only: Identify sectors to underweight.
Issuer Selection
a. For both long/short and long-only: Target issuers in sectors with the highest leverage and the most "attractive short" indicators.
Individual Security Selection
a. For both long/short and long-only: Focus on the most liquid bond trading at the tightest or highest levels relative to its model "attractive short" threshold.
Financials
The largest difference between USD and non-USD bond indices is the financial constituents. USD indices have less than 50% financials, while non-USD indices have significantly less. The three largest differences in USD vs. non-USD constituents after financials are (1) Technology/TMT, (2) Utilities, and (3) Auto Finance.
Over the past six trading days, we've provided five sector overviews. As overall credit valuation nears its peak, we'll now highlight the best examples of sector selection and model trading outputs, building on previously noted overvalued/undervalued trading indicators.
Global Banking Data
The 18 largest US banks hold ~$7.1 trillion in loans, $11.6 trillion in deposits, and $1 trillion in net debt.
The 7 largest Asian banks hold ~$4.6 trillion in loans and $5.1 trillion in deposits.
Australian banks have ~$700 billion in net debt.
Japanese banks have ~$900 billion in net cash.
The 7 largest UK banks have ~$4.8 trillion in loans, $5 trillion in deposits, and $260 billion in net cash.
The 20 largest European banks have ~$13.7 trillion in deposits, $13.7 trillion in loans, and $800 billion in net debt.
The 6 largest Canadian banks have ~$3.1 trillion in loans, $4.1 trillion in deposits, and $200 billion in net debt.
USD Financial Bonds
Financial institutions, particularly banks, account for a significant share of global corporate bonds, representing ~53% of outstanding corporate bonds. Within our G-255 universe, financials make up less than 31% of the 6,000 bonds and 36% of the market cap, indicating lower weight among the world's largest issuers.
European Banks
UK and European banks hold over twice as many loans and deposits as the top 23 US financial issuers. In the USD market, US bank bonds total 772 ($1.33 trillion), comprising 44% of all financial USD bonds and 56% of USD financial market cap.
What is attractive in Euro Yankee Banks? See the attached European Bank Earnings Digest for details.
G-255 European Bank Operating metrics (in USD) 2Q 2025 (12 attractive short / 8 attractive long)
European banks (excluding UK) have roughly twice the loans of US banks and 30% more deposits.
Nordic Banks: Least attractive long (4 re-levering / 2 de-levering).
French Banks, Santander (SANTAN Baa1/A-), Deutsche Bank (DB Baa1/BBB+): Most attractive long trading indicators.
G-255 European Bank Balance Sheet metrics (in USD) 2Q 2025
Excluding the $700 billion+ Nordic bank net debt, there is minimal net debt in the European banking system.
Dutch and Italian Banks: Least attractive short or avoid trading indicators.
BBVA (BBVASM Baa2/BBB+), UBS (UBS A-/A2): Most attractive short trading indicators.
Trading model still has UK Banks as the most attractive long trading indicator.
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 ±7.64 bp per trade. Between June 30 and August 14, 2025, 25 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.
Inflation, Economic Data, and Interest Rates
Nothing on Monday
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +7% above average
-G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 87% of top 100 issuer volume and 70% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -2% below average
-G-255 Issuers: 11 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 41% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged @ 50bp
U.S. IG Cash Spreads: were unchanged with IG utilities wider.
CDX HY Index: -.2 @ 107.3 (per Bloomberg).
HY Cash Bonds: BB Utilities and Technology were the best performing sector and BB materials were lower Monday.
High-Yield Activity
- Dealers bought $300mm of HY bonds Monday.
Most Bought HY Bonds
- Petroleos Mixicanos (PEMEX B3/BBB attractive short)
Most Sold HY Bonds
- GLP Capital (GLPI Ba1/BBB-, attractive short)
Investment-Grade Activity
- Dealers bought $2.1 bil of IG bonds Monday.
Most Bought Sector: Yankee Banks
- Societe Generale (SOCGEN Baa2/BBB attractive long )
- Royal Bank of Canada (RY A1/A attractive long)
Most Sold Sector: Big 6 banks
- Bank of America (BAC, A1/A- attractive short)
- JP Morgan (JPM, A1/A attractive short)
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 150 bonds ($219.4 billion) are considered undervalued by the stochastic credit trading model, with 58 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1509 bonds ($1.74 trillion) are considered overvalued by the stochastic credit trading model with 1012
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $757.9 billion in overvalued market capital across 302 bonds, with 206 short indicators.
Single A Industrials: $118.9 billion, in overvalued market capital across 104 bonds, with 88 short indicators.
Single A and BB Energy $184 billion in overvalued market capital across 108 bonds, with 81 short indicators.
Single A Healthcare $172 billion in overvalued market capital across 118 bonds, with 97 short indicators.
Issuer News
SoftBank Group Corp (SOFT BB+ attractive long) purchased $2 billion of Intel Corp (INTC Baa2/BBB attractive short) stock as the US government considers a 10% INTC stake.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 48% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: Our systematic credit trading indicators now have the overall US credit market (IG and HY) as significantly overvalued. We are now at 139 of the world's 255 largest issuers of corporate debt, adding leverage to their balance sheets.
2025 10 - year credit spreads: Are tighter YoY and still wider YTD.
UST 10Y rates are +47 bp higher YoY and -23 bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlated for a fifth straight trading day as neither US equities or corporate debt had material movement in either direction. While credit spread movement has an 80% correlation with equity price movement, the magnitude of these moves has changed markedly over the past two years. This owes to the world's largest corporates using balance sheet to fund equity share repurchases and dividend payouts.
New Supply, Bond Maturities, and Credit Fund Inflows for August
Monday saw 3 significant G – 255 new issue which bring the number of new deals for month of August to 26 (64 different bonds). Eli Lily (Aa3/A+) sold a 7 tranche $6.75 billion transaction which included a $750mm 3 year floating rate note that came @ SOFR +53 which on a historic basis is unusual given the size of the deal. While front end USD credit spreads are near all – time tights, the Lily deal was fairly priced and should perform well despite the level of credit valuation. We note that Eli Lily has been adding significant debt over the past 2 year to fund acquisitions and returns to shareholders.
McDonald's (MCD Baa2/BBB+) sold $1.3 billion of 5 and 10Y debt with one of the better concessions to secondary that we have seen since credit spreads tightened to "overvalued." Charter Communications (CHTR Ba1 / BBB-) sold $2 billion of 10 and 30 year debt which while is still +10 bp wider since reporting results on July 25, are still – almost (-85 bp) tighter YoY.
Systematic Trading Model Indicators and Strategy
Model Output
1103 Attractive short indicators . 8 more than Monday and now the systematic trading overall credit indicator changes to "significantly overvalued."
58 attractive long indicators: unchnaged from Monday and still within 25% of "attractive short" overall credit market indicator.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for new issue long positions is 10 years.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid short positions with maturities around 7 years, as they are the least attractive.
Replace Longs: Replace Systematic attractive long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Once the 70% long position hurdle as attained, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
24 long trades reached their avoid trading levels in the past 35 days and were replaced by 9 new issue and new short trade indicator.
Systematic Credit Trading Strategy August 18, 2025
Closed Positions: ln the past week long/ short basket trade exited the Barclays (Baa1/BBB-) BACR FRN 11/11/29, exited the CVS (Baa3/BBB) CVS 5 09/15/32, exited the Daimler Truck (A1/A) DTRGR 5 10/12/32, Citigroup (Ba1/BB+) C 6 7/8 PERP, Barclays Baa1/BBB) BACR 4.476 11/11/29 and the JP Morgan (A3/A-) JPM 5.576 07/23/36
Enter New Longs: Last week the model indicator added CVS (Baa3/BBB) CVS 5 9/15/32, and the McDonald's ( Baa1/BBB+) MCD 4.4 02/12/31 and MCD 5 02/13/36 attractive long trade on Monday.
Enter New Short trades: The trading model indicators show adding at least 3 new issue trades prior to adding any short trades.
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.
Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic model.
Monday Basket Trade long/ short ratio 60%
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
The JP Morgan (A3/A-) JPM 5.576 07/23/36 reached its avoid trading level on Friday August 15.
Model Indicators from Monday - McDonald's ( Baa1/BBB+) MCD 4.4 02/12/31 and MCD 5 02/13/36 attractive long new issue indicators
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 15, 2025)
Total Trades: 144 (1% of total trades).
Performance Summary:
Long Indicators: 108/112 reached avoid-trading levels, tightening by -9.58 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +.48 bp.
Remaining Longs: 4 tightened by -8.16 bp.
Remaining Shorts: 5 tightened by -19.97 bp.
Average Spread Movement: ±7.71 bp in the recommended direction.
Success Rate: 93% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.6 trading days) normal.
BHP (BHP A1/A- attractive short ) Earnings Summary:
BHP reported 2025 revenue that fell -8% YoY while reported profit rose 14% YoY.
• 2025 underlying attributable profit fell – 26% YoY.
• 2025 copper production and pricing improved double digits
• 2025 Iron ore production was flat while price realization was down -19%
• Company 2026 guidance was improved in non US tariff related sectors while Iron ore and steel related (coal) prices remain under pressure. The company intends to "use its balance sheet" to continue to support their share price.
Financial Position:
• Operating cashflow fell -8% YoY to $18.6 billion in F2025.
• Company was free cashflow negative before dividends. In 2025.
• After capex, share repurchase and dividend payments BHP net debt rose by $1.9 bil YoY.
Trading Model Indicator: 11 of the 13 secondary USD bonds have a market capitalization of $750mm or more. 1 bond carries an overvalued trading indicator, 5 bonds have attractive short indicators. The BHP 5.3 02/21/35 has the most spread widening potential according to our credit trading model.
Equity Indicator: BHP equity is an attractive short trade its current price of GBP 1986 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.