Systematic Credit and Equity G-255 Trading Indicators for October 16, 2025
Good Morning! We are now up to 13 of the world's largest issuers of corporate debt reporting results, and that helped propel the Dow Jones Industrial Average to rise for a second day while the S&P 500 and NASDAQ retreated. US credit spreads bounced, but it's a bit early to conclude they are recovering.
Overnight, US equity futures and UST Treasuries are higher as the markets discount for a 5th day in 7 a 25 bp cut in the Federal Funds rate when the US Federal Reserve meets in 2 weeks.
US Bank Earnings:
Three more of the G-255 US banks—Morgan Stanley (MS), Bank of America (BAC) and PNC Corp (PNC) reported results on Wednesday. While headlines are circulated re: Morgan Stanley Trading and I – Banking revenue, Bank of America took a lower risk approach than all other banks to trading asset and balance sheet management while returning capital to shareholders. "Buy the dips." Sorry I can't be more original.
Synchrony Financial (SYF), not a 255 issuer reported results that not only beat expectations but showed significant improved on balance sheet credit quality on QoQ and YoY. Company also increased its share buybacks.
Conclusions from Tuesday's and Wednesday's results:
(1) US banks will continue to add financial leverage to their balance sheets and continue to add to their holdings of marketable securities financed by debt.
(2) Trading and net interest income are not truly growing.
(3) Bank of America (Bank of America (BAC) and Goldman Sachs (GS) have distinguished themselves in terms of capital management. They are not going to buyback equity if the current price is close to it's all – time high. Similarly, they will not expand balance sheet in terms of trading securities or holdings unless they see market opportunity.
(4) We are not seeing material improvement in the US economy in any of 12 US issuer results that have been reported.
Conclusion: Citigroup (C) and PNC Corp (PNC) are the only attractive long credit indicators of the 7 banks that have reported. PNC Corp (PNC) and Wells Fargo (WFC) are the only two long equity indicators at current prices.
Tariff Impact
We have seen numerous announcements from Global Auto manufacturers, Pharmaceutical producers and Oil producers. Quantitatively speaking we see little positive impact on the US economy and less positive impact on corporate earnings.
That does not imply however, that the markets are not responding to Trump pleasing headlines such as certain US drug prices "to be cut by 1000%).
Thus far US trade tariffs have been absent from earnings announcements.
Earnings Reports Wednesday
Having heard from G – 255 issuers United Airlines (UAL) last night and Nordea Bank (NDAFF) this AM we are to Marsh McLennan (MMC) , Bank of New York (BK), US Bank (USB), Charles Schwab (Charles Schwab (SCHW), Key Corp (KEY) later this am and CSX (CSX) This evening. After 13 issuer reports we have seen no change in the direction of issuer corporate balance sheet leverage.
Trading Model Output
Credit trading indicators increased to 40% above average short trade indicators and 50% below average for long trade indicators. We will see credit ETF flow data later this AM.
Credit Market Model Indicators
Both US Investment Grade and High Yield systematic trading indictors show USD credit back to overvalued. Similarly, underlying equity value of 240 of the world's 255 largest issuers of corporate debt remain overvalued even after Wednesday trading.
Trading Model Indicators and Strategy for Wednesday
ETF Corporate bond flows for the week ending October 14 were rose only slightly when compared with the week ended October 8. After Wednesday's trading, the stochastic model continues to view US credit valuations as are now overvalued, identifying long opportunities in deleveraging new supply and de-levering new supply trading behind new issue spread.
Top 3 Short-Indicated Sectors
Single A Industrials (USD)
USD Single A Healthcare
Single A Energy (USD)
Top 3 Long-Indicated Sectors
Yankee French Banks (USD/EUR)
U.S. Single A TMT (USD/EUR)
U.K. Banks (all currencies)
Trading Allocation Strategy
45% Long: Undervalued, deleveraging bonds.
35% Short: Overvalued bonds in releveraging sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days due to global regulatory requirements for material event disclosures.
Material Economic Indicators
US Rail Traffic for the week ending October 11, 2025 was 498,462 carloads and intermodal units, -1.3 % compared with the same week last year.
Total carloads for the week ending October 11 were 224,562 carloads, up 1.2% percent compared with the same week in 2024, while U.S. weekly intermodal volume was 273,900 containers and trailers, -3.3% compared to 2024.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -11 % below average.
G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading
Volume: +6% above average.
G-255 Issuers: 16 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 52% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: -.5 bp at 48.5 bp.
U.S. IG Cash Spreads: were (-1bp) tighter Energy outperforming.
CDX HY Index: rose +.2 @107.65 (per Bloomberg).
HY Cash Bonds: Were tighter led by HY Utilities.
High-Yield Activity
• Dealers sold $600mm of high yield bonds on Wednesday.
Most Bought HY Bonds: Altice (SFRFP Caa1/CCC+)
Most Sold HY Bonds: Talen Energy (TLN B2/B)
Investment Grade Activity
Dealers bought $600mm of IG bonds on Wednesday.
Most Bought Sector: BBB rated TMT
ATT (T Baa2/BBB attractive long)
T-Mobil (TMUS Baa1/BBB attractive long)
Most Sold Sector: A rated Big 6 Banks
JP Morgan (JPM A1/A attractive short)
Goldman Sachs (GS A2/Baa+ attractive short)
Attractive Trading Sectors
Long Opportunities
Focus on de-leveraging issuers, including Single A-rated global Autos, BBB-rated TMT, BBB-rated Energy, Euro Yankee Banks, and Floating Rate Notes.
Valuation Insight: The stochastic credit trading model identifies 143 undervalued bonds ($206.7 billion market value), with 55 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,501 bonds ($2.34 trillion) are overvalued per the stochastic credit trading model, with 809 short trade indicators.
U.S. Big 6 Banks (all Ratings): 303 bonds ($755 billion) overvalued, with 126 short indicators.
Single A and BB Energy: 96 bonds ($148.2 billion) overvalued, with 57 short indicators.
Single A Healthcare: 115 bonds ($165 billion) overvalued, with 82 short indicators.
Single A Industrials: 97 bonds ($106.2 billion) overvalued, with 55 short indicators.
G-255 Issuer News
Hewlett Packard Enterprise Co (HPE Baa2/BBB short credit/long equity) gave its outlook for the current fiscal year. Earnings, excluding some items, will be $2.20 to $2.40 a share in the year ending in October 2026. Free cash flow will be $1.5 billion to $2 billion, below analyst's estimates.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 36% of the widening observed from November 12, 2024, to April 10, 2025.
Model Valuation: IG and HY markets show overvaluation. Post earnings announcements from 12 of the world's 255 largest issuers of corporate debt record 140 are increasing leverage.
2025 10-Year Credit Spreads
Year-over-Year (YoY): Wider compared to last year.
Year-to-Date (YTD): Wider YTD.
UST 10-Year Rates: +1.2 bp YoY and -55 bp YTD.
Bloomberg 10Y credit spreads are derived by taking the Moody's relevant index yield and subtracting the UST 10Y YTM.
Global Equity Correlation to IG Credit Spreads
US equities and credit markets moved in opposite directions for a 9th trading day in 24, as US equity prices were mixed while US credit spreads tightened again Wednesday. The historical 80% directional correlation between US equity prices and US HY and IG credit spreads has weakened in 2025 due to changes in sector weightings in US equity and bond indices and the inclusion of non-US (Yankee) issuers in bond indices. Corporate credit continues to tighten despite the US government shutdown, supported by limited new supply. US equities typically rally following government shutdowns.
New USD G-255 supply and fund flow data
JP Morgan (JPM) became the second G – 255 USD issuer on Wednesday to sell bond post reporting earnings selling $5 billion of new bonds supply in 2 bonds. Clearly, new bank capital rules is leading to greater financial leverage with large US banks.
This the fourth JPM 11 nc 10 TLAC offering of 2025. Thus far JPM has sold $13.25 billion of Senior and Subordinated bonds at the 10Y level. The JPM 5.502 01/24/36 senior holdco 11nc 10 now trades 77/10Y so the spread tightening of the JP Morgan new 11nc 10 is limited.
Net inflows to ETFs totaled $9.19b in the week ended Oct. 14, 2025, including the effect of leveraged funds,
compared with $14.5b last week.
Broad bond-market ETFs dropped by $234.8m to $4.25b
Corporate bond ETFs dropped by $2.3b to $979.2m
Investment-grade ETFs dropped by $1.43b to $7.23b, and high-yield ETFs swung by $2.18b to outflows of
$532.1m
Flows into dedicated Investment Corp Bond ETFs fell by $447mm to $256mm
Flows out of dedicated High Yield Corp Bond ETFs – $12mm vs. $1.05 billion a week ago
IShares U.S Treasury Bond ETF had the biggest inflow, of $1.18b
Invesco Senior Loan ETF had the biggest outflow, of $530.6m
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 809, +203 from Wednesday +61% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 47, -8 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.
Short Positions: Target re-leveraging issuers trading at the deepest discount from their model avoid point, avoiding 7-year maturities due to low attractiveness.
Replace Longs: Swap long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 65% long position threshold is reached.
Current Status: Do add new supply trades where issuer is de-levering; add new issue bonds where spreads widened by +2 basis points.
Current Status of trading indicators below:
This week 1 long trade and 1 short trade reached their avoid trading level.
Systematic Credit Trading Strategy October 16, 2025
Closed Positions: Broadcom (A3/A-) AVGO 4.8 02/15/36 added +5 bp behind new issue spread reached its reached its avoid trading level on Wednesday
Enter New Longs: Last week the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread. Broadcom (A3/A-) AVGO 4.8 2/15/36 trading +5bp to new issue spread was the new issue trade indicator added on Friday.
3. Enter New Short trades: The trading model indicators show adding short trades and for each new long added.
4. Monitor Trade Position 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 65% 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 63.6%
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
New Trade Indicators Wednesday: The Broadcom (A3/A-) AVGO 4.8 02/15/36 added +5 bp behind new issue spread reached its reached its avoid trading level on Wednesday
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 15, 2025)
Performance Summary: Total Trades: 172 (1% of total trades).
Long Indicators: 120/135 reached avoid-trading levels, tightening by -9.31 bp.
Short Indicators: 29/37 reached avoid-trading levels, widening by +5.62 bp.
Remaining Longs: 15 widened by +1.99 bp.
Remaining Shorts: 8 tightened by -11.44 bp.
Average Spread Movement: ±6.74 bp in the recommended direction.
Success Rate: 86% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20.1 trading days) below normal.
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.