Systematic Credit and Equity G-255 Trading Indicators for September 18, 2025
In today's report: Federal Express (FDX), CSC Holdings (CSCHLD), Solstice Advanced Materials (SOLADV), Royal Bank of Canada (RY), Barclays PLC (BACR), Morgan Stanley (MS), Goldman Sachs (GS), Deutsche Bank (DB), Bank of America Corp. (BAC), Honeywell (HON)
How long/short is the model:
Good Morning! They came, they saw, they lowered, and they released their "dot plot." The 25 bp cut in the US Federal Funds rate on Wednesday was followed by a flurry of guestimates and overstatements, the largest of which related to the US Federal Reserve's "Dot Plot" projecting two more rate cuts in 2025. Keep in mind, the Dot Plot reflects only a slight majority of Fed Governors. As we've noted before, the Dot Plot is not a robust predictor of future economic activity or Fed policy. On the same page, the Fed now projects US CPI reaching its 2% target in 2028. We'll pencil that in as well.
US credit markets traded slightly better on Wednesday, while the SPX dipped and the Dow Jones (less tech-heavy than the SPX) climbed higher. If there was a discernable US market reaction to the Fed's statement and policy shift in Wednesday's trading—we couldn't find it.
This morning, however, US equity futures are "strong like bull," trading materially higher in Asia overnight with follow-through in Europe this AM. Before the next Fed meeting at the end of October, we'll get another round of inflation and employment data for September. September inflation data is heavily "seasonally adjusted" each year. That said, most CPI components—like gasoline, used cars, and US airline prices—are trending higher year-over-year for the first time in 10 months. The Federal Reserve is surely aware and hence, Fed Chair Powell's caution about inflation in Wednesday's remarks.
US Rail Carloads and GDP
We also note that US railcar loadings are now negative YoY, a direct indicator of US economic activity. The US ships over 50% of its goods by rail, more than any other country. Hence US rail carloads are the single most correlated concurrent economic indicator to overall GDP.
One month of economic data doesn't make a trend, but in markets where "the trend is your friend," pricing trends are creeping higher while unit volumes are slipping lower.
US ETF credit flows
We observed a continued slowdown in new capital flowing into US credit ETFs, alongside this headline on
Wednesday: "Donald Trump's efforts to rewire global trade and pressure the Federal Reserve are prompting investors to trim their US exposure, according to Mercer LLC. A growing number of Mercer's clients are switching money from the US to Europe, Japan, and elsewhere due to concerns over tariffs, Trump's pressure on the Fed, the rising deficit, and the prospect of a weaker dollar." We have been observing this trend for 3 months.
We would also note that an uptick in US inflation while at the same time projections for further rate cuts would speed further allocation away from USD investment funds.
Our trading indicators are flashing overvalued readings for US IG credit and the 245 equities with over $15 billion of tradable debt outstanding. They're not yet at "peak" valuation but are within 2% of those levels. We also see long trades (including new supply) at a cyclical low 4.5% of all extreme trading model indicators.
Our model also continues to display its top attractive short trading recommendation sector trade indicator as US Single A Industrials which were stronger (tighter) again on Wednesday.
Finally, we will hear from Federal Express (FDX) this afternoon and will get a better fix on both the US and global economies. However, our focus will be on the number of "adjustments" are needed (we don't expect many) to make reported earnings look more palatable to investors.
Trading Model Indicators and Strategy for Thursday
Our systematic trading model indicates USD high-yield (HY) and investment-grade (IG) credit as overvalued. Inflows into non USD funds are growing, they are growing at a slower pace. Post-Wednesday trading, 5-year credit remains the most attractive maturity sector.
Today's Systematic Trading Sector Indicators
Top 3 Short-Indicated Sectors:
Big 6 Senior Bank Holdco (USD only)
USD Single A Healthcare (USD only)
Single A Industrials (all currencies)
Top 3 Long-Indicated Sectors:
US Regional Banks (USD)
US BBB/BB TMT (USD and EUR)
UK Banks (all currencies)
USD Systematic Trading Model
This morning's model indicators suggest US credit overvalued with the most likely trading scenario wider over the next 5 – 10 trading days.
Trading Allocation Strategy
47% Long: Undervalued, deleveraging bonds.
33% Short: Overvalued bonds in re-leveraging sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 159 long/short trades in 2025 (marked via TRACE), 90% achieved ±5 bp targets, averaging ±7.33 bp per trade. Last week, US corporate bond ETFs and mutual funds saw smaller inflows for investment-grade bonds, while high-yield inflows flipped to positive.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, as global regulatory requirements for reported material events could impact trading without notice.
US Economic Indicators / Inflation and Interest Rate Outlook
Railroads (AAR) reported U.S. rail traffic for the week ending September 13, 2025. Total U.S. weekly rail traffic was 514,167 carloads and intermodal units, down -1.6% compared with the same week last year.
Total carloads for the week ending September 13 were down -0.5% compared with the same week in 2024, while U.S. weekly intermodal volume was 282,930 containers and trailers, -2.6% compared to 2024.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: average.
G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 96% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
Volume: average.
G-255 Issuers: 10 of the top 25 traded bonds accounted for 44% of top 25 issuer volume and 60% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: +0.5 bp at 47.9 bp.
U.S. IG Cash Spreads: were slightly tighter, with financials outperforming.
CDX HY Index: fell -.1 to 107.75 (per Bloomberg).
HY Cash Bonds: higher, with Energy and BB healthcare outperforming.
High-Yield Activity
• Dealers bought $550mm in HY bonds on Wednesday.
Most Bought HY Bonds: CSC Holdings (CSCHLD Caa1/CCC+ attractive short)
Most Sold HY Bonds: Solstice Advanced Materials (new issue SOLADV Ba2/BB+)
Investment Grade Activity
Dealers sold $950mm of IG bonds on Wednesday.
Most Bought Sector: Yankee Banks
RBC (RY A1/A, attractive long)
Barclays PLC (BACR Baa1/BBB+ attractive long)
Most Sold Sector: Big 6 Banks
Morgan Stanley (MS A1/A-, attractive short)
Goldman Sachs (GS A2/BBB+ 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: The stochastic credit trading model identifies 140 undervalued bonds ($215.9 billion), with 52
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,575 bonds ($2.44 trillion) are overvalued per the stochastic credit trading model, with 1105 short trade indicators.
U.S. Big 6 Banks (All Ratings): 308 bonds ($765 billion) overvalued, with 204 short indicators.
Single A and BB Energy: 109 bonds ($179.1 billion) overvalued, with 72 short indicators.
Single A Healthcare: 120 bonds ($174 billion) overvalued, with 95 short indicators.
Single A Industrials: 113 bonds ($125.8 billion) overvalued, with 97 short indicators.
G-255 Issuer News
Deutsche Bank AG is on track to report higher revenue from trading fixed income and currencies in their 3Q results than analysts currently expect, according to Chief Financial Officer James von Moltke. "We see that performance up at least high single digits in FIC, which is a bit ahead of where consensus is," von Moltke said at an investor conference organized by Bank of America Corp. in London.
Deutsche Bank (DB Baa1/BBB) credit and equity both have long trading indicators.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 45% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation
The systematic credit trading indicator (Investment Grade and High Yield) is overvalued. A record 140 of the world's 255 largest corporate debt issuers, the highest in the 34-year history of the trading model, are increasing leverage on their balance sheets.
2025 10-Year Credit Spreads
Year-over-Year (YoY): 10-year credit spreads are wider compared to last year.
Year-to-Date (YTD): Spreads are wider YTD.
UST 10-Year Rates: Up 36 basis points (bp) YoY but down -50 bp YTD.
Spread Widening: The Bloomberg/Moody's 10Y index shows wider spreads due to new bond supply at elevated levels over the past 2 ½ weeks, combined with a -16 bp decline in UST 10-year yields since September 1, 2025.
Global Equity Correlation to IG Credit Spreads
US equities failed to correlate directionally with credit for a sixth day. As the S&P 500 fell slightly and US credit was slightly tighter on Wednesday. USD 10Y credit and equity prices have correlated 141 out of 189 trading days in 2025. This is well below normal over the past 33 years. 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
Investments in US-listed fixed income exchange-traded funds declined 24% in the past week for the 23rd straight week of inflows. Net inflows to ETFs totaled $7.71b in the week ended Sept. 16, 2025, including the effect of leveraged funds, compared with $10.1b the prior week
Broad bond-market ETFs dropped by $1.46b to $3.11b
IShares 7-10 Year Treasury Bond ETF had the biggest inflow, of $2.34b
Vanguard Intermediate-Term Corporate Bond ETF had the biggest outflow, of $1.08b
IG corp bond inflows fell to $3.356 bil from $3.522 bill
HY corp bond inflows fell to $1.018 bil from $1.036 bill
There was no new G – 255 supply on Wednesday.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1109, -4 from Wednesday +100% above the 200 day moving average of all model short trading recommendations.
Attractive long indicators: 52, -9 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 5-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:
During the last week 5 long trades reached their avoid trading level and was replaced by 5 new issue trade indicators.
Systematic Credit Trading Strategy September 19, 2025
Closed Positions: Last week our trading model indicators showed 4 bonds that reached their avoid trading levels. On Monday 4 more new issue trades reached their reached their levels.
Enter New Longs: Last week the model added 5 new issue trades. Monday the model added the the RBC (Baa2/BBB) RY 6 ½ 11/24/2085 60nc10 as the next new supply indicator trade.
3. Enter New Short trades: The trading model indicators show adding short trades for each new long added (change from yesterday's trading indicators). Model added Honeywell (A2/A) HON 4 1/2 01/15/34 as the next short trade indicator on Tuesday
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. Thursday's 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
No new trade indicators on Thursday
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 17, 2025)
Total Trades: 161 (1% of total trades).
Performance Summary:
Long Indicators: 119/127 reached avoid-trading levels, tightening by -9.33 bp.
Short Indicators: 27/33 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 9 tightened -1.2 bp.
Remaining Shorts: 6 tightened by -17.4 bp.
Average Spread Movement: ±7.23 bp in the indicated direction.
Success Rate: 91.5% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (19.77 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.