Systematic Credit and Equity G-255 Trading Indicators for August 20, 2025
Well, that didn't take long. Our trading model's attractive short indicators fell to 1,044, down 59 from Tuesday, causing the systematic trading overall credit indicator to revert to "overvalued." So, is this it? Most likely not. We had some lackluster earnings reports on Tuesday, and there's ongoing confusion about how many directions the White House can pursue in "political-economic" policy at once. If it isn't a potential stake in Intel, it's trade tariffs posing a longer-term challenge for U.S. healthcare, pharma, and industrial issuers. And if not those issues, there's the Russia/Ukraine/NATO discussions keeping markets on edge.
Market Credit indicators – still tighter.
Hence, we take a different perspective: How can equities be down only 1% from their highs while credit spreads widen by +1 to +3 basis points, given the uncertainty sown by Washington?
More Earnings Confusion
Last week, we discussed how John Deere (DE A1/A, attractive short both equity and debt) is unlikely to match its 2023 earnings in the next two years, yet it trades at an all-time high stock price. Its price/earnings valuation reflects re-levering of its balance sheet by 10% per year, and its credit spread is within 8% of an all-time tight level.
Today, we turn to Home Depot (HD A1/A, attractive short both debt and equity), which reported earnings yesterday, presenting a similarly puzzling trading picture. HD's comparable store sales are running at 1% per year, with management guiding similarly for the future. Operating cash flow is declining by nearly 20% annually, and the company's balance sheet added no net debt for just the fourth quarter out of the last 20. This is due to HD not opening new stores and refraining from equity repurchases in the past six months—unlike most peers, they only repurchase when the price is well below the 200-day moving average.
That said, HD shows no comparable store sales growth, isn't expanding stores, has rapidly declining cash flow, yet its equity trades at 29x earnings and is within 5% of its all-time high. FactSet and YCharts reported an "upside surprise" with yesterday's earnings, as HD equity rose 3.5% on the day.
Our trading model doesn't offer opinions or projections. HD's 7-year and shorter maturity bonds trade at all-time tight spreads, while 8-year and longer maturities are within 6% of their all-time tight credit spreads.
Model Indicators
Short HD Equity: At $414 per share – Avoid HD bonds.
DE Share Price Update: Up 2.5% since bottoming at $468 on Friday, but still below the systematic trading model's $511.33 attractive short price target.
There are still 9 short Deere bond trade indicators, with the DE 5.45 01/16/35 offering the most spread-widening potential.
Why We Expect Credit Spreads to continue tighten
Tuesday's trading volumes were 15% below normal.
Certain equities are finally taking hits, but of the 244 in our model, only two-thirds are considered "overvalued."
While G-255 new issue volume has picked up with credit spread movements, there's very little net cash (after maturities and inflows) being deployed.
We'll review this morning's fund flow data—but credit spreads can't widen if cash dynamics remain positive.
A minimum 5% pullback in U.S. equity prices would be needed to see widening at the 10-year credit level.
If you're wondering why we discuss U.S. equities (and why the model evaluates both equity and debt for 245 eligible issuers), note that the correlation between U.S. 10-year credit and equity price movements has been above 0.85 for the past 32 years.
Since I am out of space, today's model output for the U.S. Big 6 banks is abbreviated. This group represents the largest proportion of short indicators within the USD trading model (excluding Euro and GBP-denominated bonds), with nearly $500 billion in attractive short trades.
We are publishing detailed individual bond and equity indicators for five of the Big 6 banks, covering 196 bonds with short trade indicators as of this morning. Full details are available in the attached Big 6 Model Trading Earnings Digest.
For access to individual credit curves covering all 900 bonds and their indicators, please contact us.
Trading Indicators (See Attached Earnings Digest)
• The Big 6 banks remain the most attractive short trading indicator.
• The trading model continues to identify 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 ±7.59 bp per trade. Between June 30 and August 19, 2025, 26 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
US Housing starts rose to 1,428k annualized vs 1,358k in July, Census Bureau data show.
Building permits fell to 1,354k vs 1,393k Lowest since June 2020
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -17% above average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 92% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -14% below average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 57% of top 25 issuer volume and 47% of total TRACE volume.
Market Movement
U.S. CDX Index: +.3 @ 50.4bp
U.S. IG Cash Spreads: were (+1 to +3bp) wider to with IG Financials underperforming.
CDX HY Index: -.1 @ 107.2 (per Bloomberg).
HY Cash Bonds: BB TMT outperformed and Consumer bonds were lower Tuesday.
High-Yield Activity
- Dealers bought $300mm of HY bonds Tuesday.
Most Bought HY Bonds
- Carnival Cruise Lines (CCL Ba3/BB+ attractive long)
Most Sold HY Bonds
- Cogent Communications (CCOI B3/B)
Investment-Grade Activity
- Dealers bought $600mm of IG bonds Tuesday.
Most Bought Sector: BBB Energy
- MPLXS (MPLX Baa2/BBB attractive long )
- ONEOK (OKE Baa2/BBB attractive short)
Most Sold Sector: Big 6 banks
- Wells Fargo (WFC, A1/BBB+ attractive short)
- Goldman Sachs (GS, A2/BBB+ 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 137 bonds ($203.2 billion) are considered undervalued by the stochastic credit trading model, with 51 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1499 bonds ($1.75 trillion) are considered overvalued by the stochastic credit trading model with 1044
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $760.1 billion in overvalued market capital across 303 bonds, with 206 short indicators.
Single A Industrials: $115.8 billion, in overvalued market capital across 102 bonds, with 86 short indicators.
Single A and BB Energy $177 billion in overvalued market capital across 108 bonds, with 81 short indicators.
Single A Healthcare $170.6 billion in overvalued market capital across 116 bonds, with 95 short indicators.
Issuer News
Intel Corp (INTC Baa2/BBB, Attractive Short): Commerce Secretary Howard Lutnick confirmed discussions with Intel Corp for the U.S. government to take an equity stake in the chipmaker. The plan aims to convert Chips and Science Act grants into equity without granting governance or voting rights, potentially making the federal government Intel's largest shareholder.
SoftBank Group Corp (SOFT BB+, Attractive Long): SoftBank's digital payment provider, PayPay Corp., has confidentially filed a draft registration for a U.S. stock market debut. Details on the schedule, size, and price of PayPay's American depositary receipts public listing are still under consideration.
CSX (CSX A3/BBB+, Attractive Bond Short/Attractive Long Equity): Activist investor Ancora Holdings urged railroad operator CSX to pursue a merger with a rival or replace its CEO, according to a letter reviewed by The Wall Street Journal. Ancora is prepared to launch a proxy fight for board seats later this year if CSX does not follow its recommendations.
Medtronic (MDT A2/A, Attractive Short Corp Bond/Long Equity): Medtronic will expand its board following Elliott Investment Management's emergence as a major investor. The company will appoint medical technology veterans John Groetelaars and Bill Jellison as independent directors.
Ford (F Ba1/BBB-, Attractive Short Equity and Debt): Ford and SK On are seeking buyers for surplus battery supply from their joint-venture Kentucky factory, driven by declining U.S. demand for electric vehicles.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 40% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: Our systematic credit trading indicators are back to overall US credit market (IG and HY) as overvalued. We are now at 138 of the world's 255 largest issuers of corporate debt, adding leverage to their balance sheets.
2025 10 - year credit spreads: Are flat YoY and still wider YTD.
UST 10Y rates are +50 bp higher YoY and -27 bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlated for a sixth straight trading day as US equities were lower and US IG spreads were wider. More specifically as US bank equities pulled back over the past 2 trading days we saw US big 6 bank bonds the most sold and bank credit spreads wider by (+2 to 3bp)
New USD G-255 supply and fund flow data
4 more G – 255 issuers sold bonds on Tuesday. Allianz (ALVGR A3/A) sold the only type of USD debt that they have outstanding in the US. That being Subordinated. On Tuesday Allianz printed another Perp this time with 6.55 coupon and an 8.7 year call. The proceeds will go to fund their tender for existing ALVGR perp. The trading model indicator shows minimal upside for the new bond.
Metropolitan Life (MET Aa3/AA-) and Prudential (PRU Aa3/AA-) both sold asset backed debt in less than $1 bil tranches. The Met 3Y FRN was the most attractive offering according the trading model. With Tuesday's offerings we have already seen $15 billion of total supply for the week which was the estimate for the entire week from most dealers.
Metropolitan Life (MET, rated Aa3/AA-) and Prudential (PRU, rated Aa3/AA-) each issued asset-backed debt in tranches under $1 billion. Among these, the Met 3-year floating-rate note (FRN) stood out as the most attractive offering based on the trading model's analysis. With Tuesday's issuances, the total bond supply for the week has already reached $15 billion, matching the full-week estimate provided by most dealers.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive Short Indicators: 1,044, down 59 from Tuesday, causing the systematic trading overall credit indicator to revert to "overvalued."
Attractive Long Indicators: 51, down 7 from Tuesday, remaining within 25% of the "attractive short" overall credit market indicator.
Attractive long indicators: 51, down 7 from Tuesday, remaining within 25% of the "attractive short" overall credit market indicator.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Optimal 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 is reached, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
In the past 35 days, 24 long trades reached their avoid trading levels and were replaced by 9 new issue and new short trade indicators.
Systematic Credit Trading Strategy August 18, 2025
Closed Positions: Over the past week, the long/short basket trade exited the following:
CVS (Baa3/BBB) CVS 5 09/15/32
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
JP Morgan (A3/A-) JPM 5.576 07/23/36
PNC Corp (A3/A-) PNC 5.373 07/21/36
2. Enter New Longs: Last week, the model indicator added:
• CVS (Baa3/BBB) CVS 5 09/15/32
• McDonald's (Baa1/BBB+) MCD 4.4 02/12/31
• McDonald's (Baa1/BBB+) MCD 5 02/13/36 (added as an attractive long trade on Monday).
3. Enter New Short trades: The trading model indicators show adding at least 3 new issue trades prior to adding any short trades.
4. 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.
5. Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic
6. Wednesday Basket Trade long/ short ratio 50%
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 PNC Corp (A3/A-) PNC 5.373 07/21/36 reached its avoid trading level on Tuesday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 19, 2025)
Total Trades: 146 (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: 6 tightened by -2.56 bp.
Remaining Shorts: 5 tightened by -18.44 bp.
Average Spread Movement: ±7.58 bp in the indicated direction.
Success Rate: 93% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.6 trading days) normal.
Home Depot (HD A2/A att short to attractive long ) Earnings Summary:
Home Depot reported 2Q 2025 revenue that rose 5.9% YoY while reported profit was flat.
• 2Q comparable store sales rose 1% YoY.
• 2Q average ticket rose 1.2% YoY.
• Company opened 9 new stores year to date.
• Company 2025 guidance is for 13 new stores total and 1% total comparable store sales growth.
Financial Position:
• First half operating cashflow fell -18% YoY to $8.9 billion in F2025.
• First half after Capex free cash flow rose to $2.8 billion from a deficit owing to no acquisitions in 2025.
• After capex, and dividend payments (no share repurchase in first half 2025) Home Depot total debt was flat QoQ and -$3.4 billion YoY. Net debt fell by -$4.9 billion to $49.51 billion.
Trading Model Indicator: 31 of the 38 HD secondary USD bonds have a market capitalization of $1 billion or more. The trading model changes its HD indicator to attractive long with 1 bond HD 2 1/8 09/15/26 having an undervalued trading indicator.
Equity Indicator: HD equity is a short trade @ $414 per share.
Medtronic (HD A2/A attractive short) Earnings Summary:
Medtronic reported 1Q 2026 revenue that rose 8.4% YoY while reported profit was flat.
• 1Q organic sales were 4.2% YoY.
• 1Q revenue rose in every sector with Diabetes treatment the strongest 11.2% YoY.
• Company expects continued impact from US trade tariffs.
• Medtronic 2026 remains for 4-5% profit growth.
Financial Position:
• 1Q operating cashflow rose 10% YoY to $1 billion in F2026.
• 1Q free cash flow was slightly negative.
• After capex, and dividend payments and share repurchase MDT total debt was flat QoQ and +$1.4 billion YoY. Net debt rose by $400mm QoQ and $900mm YoY.
Trading Model Indicator: 5 of the 8 MDT secondary USD bonds have a market capitalization of $1 billion or more. There are 3 trading model short trade indicators with the MDT 4 3/8 03/15/35 having the most credit spread widening opportunity according to our trading model.
Equity Indicator: MDT equity is attractive long @ $86 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.