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Wed, August 27, 2025

Systematic Credit and Equity G-255 Trading Indicators for August 27, 2025

What we do: Our trading model provides both high level and individual bond trading indicators that are used as risk management tools and for generating daily credit trades. This model produces 12,400 trade indicators daily, covering 6,200 bonds. The "Global 255" corporate issuer systematic credit trading research universe encompasses over 6,200 bonds representing $6.5 trillion in USD market capital. These bonds dominate the market, accounting for more than 75% the daily investment-grade (IG) corporate bond trades reported on TRACE.

President Donald Trump urged Cracker Barrel Old Country Store Inc. to revert to its original logo following backlash against its new design. The stock surged by up to 6.3% after Trump's social media post, recovering from a decline last week driven by widespread criticism of the logo change. Say what?

Key Transactions and Headlines

Three major developments—AT&T (T Baa2/BBB, attractive long)/EchoStar (SATS Caa1/B, short to attractive long), UnitedHealth (UNH A1/A, attractive short), and French banks— disrupted credit markets. The "Trump trade" narrative is driving rapid capital movements despite trading volumes being 15% below average.

  • AT&T/EchoStar Deal: AT&T's $23 billion acquisition of EchoStar's spectrum licenses triggered three new trade indicators from systematic models. AT&T spreads widened, while EchoStar (SATS) and DISH (DISH Caa3/CCC-, attractive short to attractive long) saw 10-point increases post-announcement.

  • UnitedHealth Investigation: Ongoing DOJ scrutiny of UnitedHealth, now covering Optum Rx and physician payments, widened healthcare credit spreads.

  • French Banks: French budget concerns pushed credit spreads wider for all G-255 French issuers, with Yankee spreads following suit.

Federal Reserve and Government Influence

President Trump's push to remove Federal Reserve Governor Lisa Cook has sparked concerns about central bank independence, contributing to a weaker U.S. dollar and rising longer-dated bond yields. Meanwhile, Commerce Secretary Howard Lutnick's suggestion that the U.S. government may take stakes in defense contractors tightened Single A industrial spreads.

Credit Market Dynamics

U.S. credit indicators suggest tighter valuations, but significant trades have widened credit spreads:

  • High-yield (HY) valuations remained unchanged despite the AT&T/EchoStar deal.

  • BBB TMT spreads widened.

  • U.S. credit is no longer within 10% of a systematic "short" signal.

  • Model indicators for LQD ETF generated new trade signals overnight (detailed on page 3).

Canadian Bank Earnings

Bank of Montreal (BMO A2/A-, attractive short credit/attractive long equity) and Bank of Nova Scotia (BNS A2/A-, attractive long credit and equity) reported strong earnings, signaling positive prospects for U.S. banks (recapped on page 6).

Trump's Influence

The Cracker Barrel reaction underscores how Trump's statements drive investor behavior, with capital flowing swiftly in response to his comments. Five new trade indicators were generated overnight (published separately). U.S. regional bank indicators, originally planned for today, will be released tomorrow.

Today's Systematic Trading Indicators

  • Big 6 subordinated bank Holdco (USD only)

  • USD Single A Industrial sector (USD only)

  • European Single A Energy (all currencies)

Are the top 3 short indicated sectors.

  • UK Banks (all currencies)

  • US BBB TMT (USD and EUR)

  • French Banks (all currencies)

Are the top 3 long indicated sectors.

USD 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 ±7.45 bp per trade. Between June 30 and August 25, 2025, 27 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.

Tuesday's U.S. Credit Trading

Investment-Grade (IG) Trading

-Volume: -11% below average

-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 71% of total TRACE volume.

High-Yield (HY) Trading

-Volume: -22% below average

-G-255 Issuers: 17 of the top 25 traded bonds accounted for 74% of top 25 issuer volume and 70% of total TRACE volume.

Market Movement

U.S. CDX Index: unchanged @ 49.7bp

U.S. IG Cash Spreads: very wider in the Yankee Bank space (as much as +6bp) and US fins were (+2bp) wider.

CDX HY Index: Unchanged @ 107.5 (per Bloomberg).

HY Cash Bonds: TMT outperformed and consumer bonds were unchanged Tuesday.

High-Yield Activity

- Dealers bought $900mm of HY bonds Tuesday.

Most Bought HY Bonds

- DISH DBS (DISH Caa3/CCC- attractive short to attractive long)

Most Sold HY Bonds

- Centene Corp (CNC Ba1/BBB-)

Investment-Grade Activity

- Dealers sold $1 billion of IG bonds Tuesday.

Most Bought Sector: Canadian Banks

- Royal Bank of Canada (RY A1/A attractive long)

- Toronto Dominion (TD A2/A- attractive long)

Most Sold Sector: Yankee Banks

- Societe General (Baa2/BBB attractive long)

- BPCE Group (BPCEGP, Baa1/BBB+ attractive long)

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 172 bonds ($264 billion) are considered undervalued by the stochastic credit trading model, with attractive 75 long trade indicators for the entire 6,000 USD bond universe.

Short Opportunities

  • 1500 bonds ($1.67 trillion) are considered overvalued by the stochastic credit trading model with 991

short trade indicators for the entire 6,000 USD bond universe.

  • U.S. Big 6 Banks (All Ratings): $726.8 billion in overvalued market capital across 290 bonds, with 180 short indicators.

  • Single A Industrials: $120.9 billion, in overvalued market capital across 103 bonds, with 83 short indicators.

  • Single A and BB Energy $171 billion in overvalued market capital across 103 bonds, with 70 short indicators.

  • Single A Healthcare $170 billion in overvalued market capital across 117 bonds, with 88 short indicators.

Issuer News

EchoStar Corp (SATS Caa1/B, short to attractive long) has agreed to sell spectrum licenses to AT&T Inc (T Baa2/BBB, attractive long) for approximately $23 billion in an all-cash transaction. The agreement covers 50 MHz of nationwide spectrum, including 30 MHz of 3.45 GHz mid-band and 20 MHz of 600 MHz low-band spectrum, to bolster AT&T's 5G and fiber services across over 400 U.S. markets. EchoStar's other operations, including DISH TV, Sling, and Hughes, will remain unaffected by the transaction. AT&T will finance the deal using cash reserves and additional borrowings, with the transaction expected to close in mid-2026, subject to regulatory approval.

UnitedHealth (UNH A1/A, attractive short) is under an expanded criminal investigation by the U.S. Department of Justice (DOJ), extending beyond Medicare to include Optum Rx and physician payment practices. UnitedHealth expresses "full confidence" in its compliance and business practices, denying any misconduct.

Commerce Secretary Howard Lutnick suggested that the U.S. government may take ownership stakes in certain defense contractors, triggering a slight rally in their stock prices. Lutnick specifically mentioned Lockheed Martin Corp (LMT A2/A, attractive short), which derives approximately 73% of its net sales from U.S. government contracts in 2024. Analysts have questioned the legality of such government investments. This follows the U.S. government's recent $10 billion investment in Intel (INTC Baa2/BBB, attractive short), indicating growing federal interest in strategic sectors.

U.S. IG Credit Valuation and Spreads

  • Credit Spread Recovery: U.S. credit spreads have recovered 30% of the widening observed from November 12, 2024, to April 10, 2025.

  • Credit Trading Model Valuation: Our systematic credit trading indicator is overall US credit market (IG and HY) is overvalued. 139 of the world's 255 largest issuers of corporate debt, are adding leverage to their balance sheets.

  • While Front end USD credit spreads remain near all – time tight spreads, longer dated Moody's Baa credit spreads are only modestly tighter from April wide levels.

  • 2025 10 - year credit spreads: are wider YoY and YTD.

  • UST 10Y rates are +45 bp higher YoY and -30 bp YTD

Global Equity Correlation to IG Credit Spreads

For the first time in 10 trading day, U.S. IG credit spreads, HY prices and U.S. equity prices did not correlate owing to 2 separate credit events (see issuer news) and several proposed investments/actions by the US Government. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.

New USD G-255 supply and fund flow data

Sempra Energy became the second G – 255 issuer to sell bonds in the Labor Day week. The 2056 Jr. Subordinated bond was generously priced with a 6.375 coupon and the systematic trading model indicator has the reached its avoid trading level on point for this bond @ 6.25%.

Based on inflows of $22 billion (Investment-Grade) and $1.5 billion (High-Yield), combined with $37 billion in G-255 bond retirements and $165 billion in coupon interest, net G-255 buying is expected to continue before the end of August.

Systematic Trading Model Indicators and Strategy

  • Attractive Short Indicators: 991, -68 from Tuesday AM. The systematic credit market indicator remains overvalued.

  • Attractive long indicators: 75, +17 from Tuesday and no longer near the "attractive short" overall credit market indicator.

Systematic Portfolio Trading Model Indicator:

  • Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-year maturities.

  • Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.

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

  • Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 70% long position hurdle is reached.

Current Status of trading indicators below:

  • In the past 40 days, 25 long trades reached their avoid trading levels and were replaced by 9 new issue and new short trade indicators.

Systematic Credit Trading Strategy August 25, 2025

  1. Closed Positions: last week, the long/short basket trade exited 5 new issue trades. On Monday the second Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 reached its avoid trading level.

  2. Enter New Longs: Over the past 2 week, the model indicator added 6 new issues. The Trading model indicators show another +2 bp widening would create a third long trading indicator for the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31.

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's Basket Trade long/ short ratio 58%

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

On Tuesday the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 secondary trade reached its avoid trading level. On Tuesday the DB bonds traded +6bp wider (100/5Y). Should those bond widen to 102/5, the model would re-enter the DB secondary trade again.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 26, 2025)

Total Trades: 148 (1% of total trades).

Performance Summary:

  • Long Indicators: 110/116 reached avoid-trading levels, tightening by -9.53 bp.

  • Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.

  • Remaining Longs: 6 widened by -.98 bp.

  • Remaining Shorts: 5 tightened by -17.54 bp.

  • Average Spread Movement: ±7.46 bp in the recommended direction.

  • Success Rate: 93% of indicators reached avoid-trading levels, which is normal.

  • Average trade holding period: (20.45 trading days) normal.

Canadian Bank Earnings on Tuesday

Bank of Montreal (BMO, A2/A-, Attractive short) Earnings Summary:

Bank of Montreal reported 3Q revenue that rose 9.7% YoY and earnings that rose 21% YoY.

Net interest income rose 8% YoY owing to lower charge-offs..

Non-interest income was slightly lower QoQ and +2.8% YoY.

Loans were flat YoY. Credit quality was flat QoQ and declined YoY.

Company guidance is for 12% ROE in 4Q 2025.

Financial Position:

• Tier 1 capital at 13.5% v 13,5% at April 30, 2025, but up from 13.0% in 3Q 2024.

• Company used balance sheet to repurchase equity and pay dividends in 3Q 2025.

• Deposits fell by $3 billion QoQ, and $10 billion YoY to $406 billion.

• Balance sheet liquidity was declined YoY and QoQ.

• Net debt rose by 26% QoQ to $82 billion.

Dividends and share repurchases are growing at an annualized pace of 14% per annum.

Trading Model Indicator: 22 USD Bank of Montreal secondary bonds in circulation have a market capitalization of $750mm or more. 11 systematic BMO trading model indicators are overvalued, while two bonds have short trade indicators and both are Perpetual rate subordinated bonds.

Equity Indicator: BMO equity is attractive @ CAD 153.79 according to the systematic trading model.

Bank of Nova Scotia (BNS, A2/A-, Avoid Long) Earnings Summary:

Bank of Nova Scotia reported 3Q revenue that rose 13.4% YoY and earnings that rose 32%.

Net interest income rose 3.6% YoY ..

Non-interest income was slightly lower QoQ and +2.8% YoY.

Loans were flat YoY. Credit quality was flat YoY and declined QoQY.

Company guidance is for 12% ROE in 4Q 2025.

Financial Position:

• Equity Tier 1 capital was 15.2% at June 30 vs. 15.4% at April 30, 2025 and 16.9% YoY.

• Total debt rose $2 billion QoQ and $2 billion YoY while net debt rose fell by -$4 billion QoQ and -$11.8 billion YoY

• Deposits grew by $1 billion QoQ and fell -$3 billion YoY.

• While dividend and share repurchase are growing, net debt is also falling

Trading Model Indicator: 33 USD Bank of Nova Scotia secondary bonds in circulation have a market capitalization of $750mm or more. 2 systematic BNS trading model indicators are undervalued, while 5 bonds have long trade indicators with the BNS (Baa3/BBB-) 7.35 04/27/2085 01/31/25 Jr. Subordinated bond the most attractive.

Equity Indicator: BNS equity is an attractive long trade at CAD 76.45 per share.

What we do: Our trading model provides both high level and individual bond trading indicators that are used as risk management tools and for generating daily credit trades. This model produces 12,400 trade indicators daily, covering 6,200 bonds. The "Global 255" corporate issuer systematic credit trading research universe encompasses over 6,200 bonds representing $6.5 trillion in USD market capital. These bonds dominate the market, accounting for more than 75% the daily investment-grade (IG) corporate bond trades reported on TRACE. Contact gareth.moody@empirasign.com to learn more.

President Donald Trump urged Cracker Barrel Old Country Store Inc. to revert to its original logo following backlash against its new design. The stock surged by up to 6.3% after Trump's social media post, recovering from a decline last week driven by widespread criticism of the logo change. Say what?

Key Transactions and Headlines

Three major developments—AT&T (T Baa2/BBB, attractive long)/EchoStar (SATS Caa1/B, short to attractive long), UnitedHealth (UNH A1/A, attractive short), and French banks— disrupted credit markets. The "Trump trade" narrative is driving rapid capital movements despite trading volumes being 15% below average.

  • AT&T/EchoStar Deal: AT&T's $23 billion acquisition of EchoStar's spectrum licenses triggered three new trade indicators from systematic models. AT&T spreads widened, while EchoStar (SATS) and DISH (DISH Caa3/CCC-, attractive short to attractive long) saw 10-point increases post-announcement.

  • UnitedHealth Investigation: Ongoing DOJ scrutiny of UnitedHealth, now covering Optum Rx and physician payments, widened healthcare credit spreads.

  • French Banks: French budget concerns pushed credit spreads wider for all G-255 French issuers, with Yankee spreads following suit.

Federal Reserve and Government Influence

President Trump's push to remove Federal Reserve Governor Lisa Cook has sparked concerns about central bank independence, contributing to a weaker U.S. dollar and rising longer-dated bond yields. Meanwhile, Commerce Secretary Howard Lutnick's suggestion that the U.S. government may take stakes in defense contractors tightened Single A industrial spreads.

Credit Market Dynamics

U.S. credit indicators suggest tighter valuations, but significant trades have widened credit spreads:

  • High-yield (HY) valuations remained unchanged despite the AT&T/EchoStar deal.

  • BBB TMT spreads widened.

  • U.S. credit is no longer within 10% of a systematic "short" signal.

  • Model indicators for LQD ETF generated new trade signals overnight (detailed on page 3).

Canadian Bank Earnings

Bank of Montreal (BMO A2/A-, attractive short credit/attractive long equity) and Bank of Nova Scotia (BNS A2/A-, attractive long credit and equity) reported strong earnings, signaling positive prospects for U.S. banks (recapped on page 6).

Trump's Influence

The Cracker Barrel reaction underscores how Trump's statements drive investor behavior, with capital flowing swiftly in response to his comments. Five new trade indicators were generated overnight (published separately). U.S. regional bank indicators, originally planned for today, will be released tomorrow.

Today's Systematic Trading Indicators

  • Big 6 subordinated bank Holdco (USD only)

  • USD Single A Industrial sector (USD only)

  • European Single A Energy (all currencies)

Are the top 3 short indicated sectors.

  • UK Banks (all currencies)

  • US BBB TMT (USD and EUR)

  • French Banks (all currencies)

Are the top 3 long indicated sectors.

USD 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 ±7.45 bp per trade. Between June 30 and August 25, 2025, 27 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.

Tuesday's U.S. Credit Trading

Investment-Grade (IG) Trading

-Volume: -11% below average

-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 71% of total TRACE volume.

High-Yield (HY) Trading

-Volume: -22% below average

-G-255 Issuers: 17 of the top 25 traded bonds accounted for 74% of top 25 issuer volume and 70% of total TRACE volume.

Market Movement

U.S. CDX Index: unchanged @ 49.7bp

U.S. IG Cash Spreads: very wider in the Yankee Bank space (as much as +6bp) and US fins were (+2bp) wider.

CDX HY Index: Unchanged @ 107.5 (per Bloomberg).

HY Cash Bonds: TMT outperformed and consumer bonds were unchanged Tuesday.

High-Yield Activity

- Dealers bought $900mm of HY bonds Tuesday.

Most Bought HY Bonds

- DISH DBS (DISH Caa3/CCC- attractive short to attractive long)

Most Sold HY Bonds

- Centene Corp (CNC Ba1/BBB-)

Investment-Grade Activity

- Dealers sold $1 billion of IG bonds Tuesday.

Most Bought Sector: Canadian Banks

- Royal Bank of Canada (RY A1/A attractive long)

- Toronto Dominion (TD A2/A- attractive long)

Most Sold Sector: Yankee Banks

- Societe General (Baa2/BBB attractive long)

- BPCE Group (BPCEGP, Baa1/BBB+ attractive long)

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 172 bonds ($264 billion) are considered undervalued by the stochastic credit trading model, with attractive 75 long trade indicators for the entire 6,000 USD bond universe.

Short Opportunities

  • 1500 bonds ($1.67 trillion) are considered overvalued by the stochastic credit trading model with 991

short trade indicators for the entire 6,000 USD bond universe.

  • U.S. Big 6 Banks (All Ratings): $726.8 billion in overvalued market capital across 290 bonds, with 180 short indicators.

  • Single A Industrials: $120.9 billion, in overvalued market capital across 103 bonds, with 83 short indicators.

  • Single A and BB Energy $171 billion in overvalued market capital across 103 bonds, with 70 short indicators.

  • Single A Healthcare $170 billion in overvalued market capital across 117 bonds, with 88 short indicators.

Issuer News

EchoStar Corp (SATS Caa1/B, short to attractive long) has agreed to sell spectrum licenses to AT&T Inc (T Baa2/BBB, attractive long) for approximately $23 billion in an all-cash transaction. The agreement covers 50 MHz of nationwide spectrum, including 30 MHz of 3.45 GHz mid-band and 20 MHz of 600 MHz low-band spectrum, to bolster AT&T's 5G and fiber services across over 400 U.S. markets. EchoStar's other operations, including DISH TV, Sling, and Hughes, will remain unaffected by the transaction. AT&T will finance the deal using cash reserves and additional borrowings, with the transaction expected to close in mid-2026, subject to regulatory approval.

UnitedHealth (UNH A1/A, attractive short) is under an expanded criminal investigation by the U.S. Department of Justice (DOJ), extending beyond Medicare to include Optum Rx and physician payment practices. UnitedHealth expresses "full confidence" in its compliance and business practices, denying any misconduct.

Commerce Secretary Howard Lutnick suggested that the U.S. government may take ownership stakes in certain defense contractors, triggering a slight rally in their stock prices. Lutnick specifically mentioned Lockheed Martin Corp (LMT A2/A, attractive short), which derives approximately 73% of its net sales from U.S. government contracts in 2024. Analysts have questioned the legality of such government investments. This follows the U.S. government's recent $10 billion investment in Intel (INTC Baa2/BBB, attractive short), indicating growing federal interest in strategic sectors.

U.S. IG Credit Valuation and Spreads

  • Credit Spread Recovery: U.S. credit spreads have recovered 30% of the widening observed from November 12, 2024, to April 10, 2025.

  • Credit Trading Model Valuation: Our systematic credit trading indicator is overall US credit market (IG and HY) is overvalued. 139 of the world's 255 largest issuers of corporate debt, are adding leverage to their balance sheets.

  • While Front end USD credit spreads remain near all – time tight spreads, longer dated Moody's Baa credit spreads are only modestly tighter from April wide levels.

  • 2025 10 - year credit spreads: are wider YoY and YTD.

  • UST 10Y rates are +45 bp higher YoY and -30 bp YTD

Global Equity Correlation to IG Credit Spreads

For the first time in 10 trading day, U.S. IG credit spreads, HY prices and U.S. equity prices did not correlate owing to 2 separate credit events (see issuer news) and several proposed investments/actions by the US Government. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.

New USD G-255 supply and fund flow data

Sempra Energy became the second G – 255 issuer to sell bonds in the Labor Day week. The 2056 Jr. Subordinated bond was generously priced with a 6.375 coupon and the systematic trading model indicator has the reached its avoid trading level on point for this bond @ 6.25%.

Based on inflows of $22 billion (Investment-Grade) and $1.5 billion (High-Yield), combined with $37 billion in G-255 bond retirements and $165 billion in coupon interest, net G-255 buying is expected to continue before the end of August.

Systematic Trading Model Indicators and Strategy

  • Attractive Short Indicators: 991, -68 from Tuesday AM. The systematic credit market indicator remains overvalued.

  • Attractive long indicators: 75, +17 from Tuesday and no longer near the "attractive short" overall credit market indicator.

Systematic Portfolio Trading Model Indicator:

  • Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-year maturities.

  • Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.

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

  • Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 70% long position hurdle is reached.

Current Status of trading indicators below:

  • In the past 40 days, 25 long trades reached their avoid trading levels and were replaced by 9 new issue and new short trade indicators.

Systematic Credit Trading Strategy August 25, 2025

  1. Closed Positions: last week, the long/short basket trade exited 5 new issue trades. On Monday the second Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 reached its avoid trading level.

  2. Enter New Longs: Over the past 2 week, the model indicator added 6 new issues. The Trading model indicators show another +2 bp widening would create a third long trading indicator for the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31.

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's Basket Trade long/ short ratio 58%

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

On Tuesday the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 secondary trade reached its avoid trading level. On Tuesday the DB bonds traded +6bp wider (100/5Y). Should those bond widen to 102/5, the model would re-enter the DB secondary trade again.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 26, 2025)

Total Trades: 148 (1% of total trades).

Performance Summary:

  • Long Indicators: 110/116 reached avoid-trading levels, tightening by -9.53 bp.

  • Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.

  • Remaining Longs: 6 widened by -.98 bp.

  • Remaining Shorts: 5 tightened by -17.54 bp.

  • Average Spread Movement: ±7.46 bp in the indicated direction.

  • Success Rate: 93% of indicators reached avoid-trading levels, which is normal.

  • Average trade holding period: (20.45 trading days) normal.

Canadian Bank Earnings on Tuesday

Bank of Montreal (BMO, A2/A-, Attractive short) Earnings Summary:

Bank of Montreal reported 3Q revenue that rose 9.7% YoY and earnings that rose 21% YoY.

Net interest income rose 8% YoY owing to lower charge-offs..

Non-interest income was slightly lower QoQ and +2.8% YoY.

Loans were flat YoY. Credit quality was flat QoQ and declined YoY.

Company guidance is for 12% ROE in 4Q 2025.

Financial Position:

• Tier 1 capital at 13.5% v 13,5% at April 30, 2025, but up from 13.0% in 3Q 2024.

• Company used balance sheet to repurchase equity and pay dividends in 3Q 2025.

• Deposits fell by $3 billion QoQ, and $10 billion YoY to $406 billion.

• Balance sheet liquidity was declined YoY and QoQ.

• Net debt rose by 26% QoQ to $82 billion.

Dividends and share repurchases are growing at an annualized pace of 14% per annum.

Trading Model Indicator: 22 USD Bank of Montreal secondary bonds in circulation have a market capitalization of $750mm or more. 11 systematic BMO trading model indicators are overvalued, while two bonds have short trade indicators and both are Perpetual rate subordinated bonds.

Equity Indicator: BMO equity is attractive @ CAD 153.79 according to the systematic trading model.

Bank of Nova Scotia (BNS, A2/A-, Avoid Long) Earnings Summary:

Bank of Nova Scotia reported 3Q revenue that rose 13.4% YoY and earnings that rose 32%.

Net interest income rose 3.6% YoY ..

Non-interest income was slightly lower QoQ and +2.8% YoY.

Loans were flat YoY. Credit quality was flat YoY and declined QoQY.

Company guidance is for 12% ROE in 4Q 2025.

Financial Position:

• Equity Tier 1 capital was 15.2% at June 30 vs. 15.4% at April 30, 2025 and 16.9% YoY.

• Total debt rose $2 billion QoQ and $2 billion YoY while net debt rose fell by -$4 billion QoQ and -$11.8 billion YoY

• Deposits grew by $1 billion QoQ and fell -$3 billion YoY.

• While dividend and share repurchase are growing, net debt is also falling

Trading Model Indicator: 33 USD Bank of Nova Scotia secondary bonds in circulation have a market capitalization of $750mm or more. 2 systematic BNS trading model indicators are undervalued, while 5 bonds have long trade indicators with the BNS (Baa3/BBB-) 7.35 04/27/2085 01/31/25 Jr. Subordinated bond the most attractive.

Equity Indicator: BNS equity is an attractive long trade at CAD 76.45 per share.

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