Systematic Credit and Equity G-250 Trading Indicators for May 21, 2025

Long the equity / attractive short the bonds?

Good Morning and apologies for the timing. There was a Bloomberg outage (slowdown) in the early US AM hours which kept us from finishing trading model output updates. While there are numerous Macro issues incorporated into the AM's indications (with Bloomberg running slowly, the long holiday week end on both sides of the pond and trading volumes at 4 year lows its more indications than trading, Iran/US, Russia/Ukraine, Chinese credit rating agencies indicating a downgrade for Russia all in the AM's headlines if we have learned anything about the risk trade in the past few years, it's the amount of cash on the sidelines and how its deployed that determines how risk markets close. While the reaction to the headlines differs based on geography, US risk market trading have become more a function of cash, index futures, options and ETF daily flows. Those are the key components of where equities and credit price (even in credit which is almost entirely OTC traded). So when we see "Morgan Stanley is recommending buy the dips" that headline has more impact on where markets close than the US getting downgraded by Moody's or an Iran / US conflict.

Since the PPP loan distribution combined with Fed rate cuts to 0% in 2020/2021, there has been an excess cash US bubble which at its peak was $ 14.2 trillion in late 2021 which has impacted all US asset prices. US credit is back to slightly overvalued according to our trading model. And the market's response to the headlines, that creates systematic trading opportunity.

This morning our trading model calculated 357 attractive short trading indicators for the first time since February 24 of this year. And the US IG CDX remains at 55 +2.1bp since the beginning of the year and +6.7bp YoY. Cash credit spreads are materially wider than the CDX. The SPX 500 is +1.00% YTD and +11.63 YoY. Our trading model output has quantified three components (money flow, balance sheet leverage, and returns to equity shareholders funded by the corporate bond issuance) which marks the disparity of performance between corporate credit and US equities. While the correlation between US equities and corporate credit does not trade in as tight a range is it has for most of the past 35 years, directionally speaking the +.75 correlation between SPX price and US corporate bond credit spreads is actually stronger today than it has ever been at over .82. While we are unable to quantify the actual reason (owing to a lack of historic data) the most likely reason is how risk is traded today (i.e. via futures ETFs and options) versus how it was traded in past years.

Which brings us to the statistical relationships between US Equity Price/Earnings ratios and (1) Reported earnings, (2) Earnings outlooks as related by corporate issuers, (3) US interest rates, (4) US inflation, (5) Other risk market opportunities.

What the hell am I talking about? The traditional relationship between US equities and earnings, and US individual equity prices and Corporate credit spreads has continued to drift as US companies are following the lead set by 15+ years ago by issuers such as Pepsico (PEP), Philip Morris (PM) and Oracle (ORCL) raising dividends and repurchasing equity (which is much more tax efficient) and using their balance sheets to fund payouts. Pepsico (A1/A+) has been more conscious of its credit rating and been and kept is net debt growth below its revenue growth rate. While others (HCA Baa3/BBB+ as an example) care only to keep their credit rating at a level where they can continue to access the debt capital markets so to enhance shareholder returns over the years.

And so to be clear, systematically speaking we are not being critical of the financial strategy of "shareholders come first." To the contrary, the model is simply creating output that indicates where the most value on the world's largest corporate balance sheets are (bonds/equity and long or short).

The model output changes daily (6,200 USD corporate bonds and 241 equities) which trades capture the best risk /return. As we write this morning, that output is showing that the trading opportunities in both corporate bonds and the equity of the underlying issuers is going to be dependent on how the risk markets start to incorporate some of the survey, corporate outlook and inflation data and the impact of those factors on corporate ability to continue to grow dividend payments and share repurchases at a rate over double that of their revenue.

The downside here is that should shareholder payout growth slow, our trading model is telling us that quantitative phenomena will send equity prices lower and credit spreads wider.

In total the world's largest 250 issuers of corporate debt have over $20 trillion of total debt and account for 72% of all trace trading volume on a daily basis in the US. These companies will pay out roughly $1 trillion of dividends and share repurchases in Q1 2025. Their overall revenue growth will be around 4.5% YoY in Q1 while their payout to shareholders will grow 12.5% in 1Q.

Inflation Readings, Economic Data and Interest Rate Calls

Additional survey data will be released on Wednesday, including PMI data and the Kansas City Fed Manufacturing Activity Index.

Philadelphia Fed Non – Manufacturing index for May remained… miserable. -41.9 vs -42.7 April. New orders fell to -16.3 vs -6.9 and prices paid remained elevated @ 29.6 vs 46.5 in April. Full-time employment rose to 11.3 vs -7.2 last month

The 10-year UST remains the top-performing government bond globally in 2025, outperformed only by Brazil.

Seldom does survey data as depicted above appear as weak as it is while US equity prices remained near all – time high prices. The survey numbers above, combined with outlooks from issuers such as Home Depot (HD) and Walmart (WMT) were greeted with more analysts raising target prices, than cutting them.

Earnings Season

Earnings reports are still pending from British Telecom (BT), Toronto-Dominion Bank (TD), Lowe's (LOW), and AutoZone (AZO, a non-G-250 issuer). These reports should provide further clarity on the US economy's direction.

Home Depot's report yesterday (please see page 6) was not optimistic with a promise not to raise prices with the impact of US trade tariffs. The 0% comparable sales number had more to do with their promise not to raise prices than their "concern" for the consumer.

The non – Financial G 250 issuers represent roughly 35% of the total debt of the worlds largest issuers of corporate bonds and 43% of all of the USD corporate G – 250 bonds in circulation. Thus far these companies have spend over $500 billion in money returned to shareholder (12.6% increase). How much of the shareholder payout increase in 1Q for global non – financial issuers came through balance sheet leverage? A: All of it.

These trends indicate that banks must either accelerate revenue and cash flow growth or moderate dividend and share repurchase programs.

Take away the 34 non–US financial issuers' balance sheet deleveraging, and the remaining 182 corporate borrowers added $235 billion of net debt in 1Q.

Tuesday's US IG Credit Trading:

USD trading volumes were 13% below average, and G250 issuer bonds represented 36 of the 40 trading corporates and 71% of Tuesday's trading volume on TRACE. Dealers purchased $1 billion in IG credit. Financials accounted for less than 26% of bonds sold, with Siemens (SIEGR), Charter Communications (CHTR), UnitedHealth (UNH), and Oracle (ORCL) all in the top 10 traders on Tuesday.

The US CDX index was unchanged at 55 basis points, while US IG cash spreads tightened by up to 2 basis points. Financials (domestic and Yankee bonds) outperformed.

Attractive trading sectors

Long Opportunities: Selected new issues.

Short Opportunities: US Big 6 Banks, all ratings ($636.3 billion in overvalued market capital, 240 bonds, 74 short indicators).

Single A and BBB TMT ($288.7 billion in overvalued market capital, 66 bonds, 59 short indicators).

Single A and BBB Consumer ($138 billion in overvalued market capital, 107 bonds, 55 short indicatorss).

Issuer News Tuesday

Ford (F) is scaling back its electric vehicle ambitions by allowing rival Nissan to use part of its flagship U.S. battery plant. Ford made a significant bet on electric vehicles in 2021, announcing two new battery plants in Kentucky as part of a $7 billion investment.

Kraft Heinz Co (KHC) announced it is evaluating potential "strategic transactions" to boost its stock price and disclosed that Berkshire Hathaway Inc. is relinquishing its seats on the board.

Alphabet (GOOGL) is rolling out "AI mode" in search to all US users, enabling direct interaction with AI models as part of its strategy to accelerate product launches and compete with new rivals in the artificial intelligence space.

Telefonica SA (TELEFO) is considering increasing its stake in FiBrasil, a fiber-optic broadband venture in Brazil, by acquiring part or all of the remaining 50% owned by Caisse de Depot et Placement du Quebec.

Elliott Investment Management is engaging in a proxy battle with Phillips 66, its first on US soil, following a multi-year campaign criticizing the refiner's financial underperformance and business model.

U.S. IG Credit Valuation and Spreads

US investment-grade (IG) remains "slightly overvalued" but remains cheaper than its trading levels over the past two years. Credit spreads are closer to their 52-week widest levels (April 10, 2025) than to their 52-week and 5-year tightest levels (November 12, 2024). We are currently near the tightest US IG spread levels (February 22) for 2025.

Global Equity Correlation to IG Credit Spreads

Increased leverage on large US balance sheets, with approximately half allocated to shareholder returns, has caused a notable lag in the correlation between US equities (approximately +5% return year-over-year) and US IG credit spreads (approximately 25 basis points wider year-over-year).

New Supply / Bond Maturities / Credit Fund outflows for May

Tuesday's new bond issuance was led by an attractively priced $7 billion 7 part Siemens (SIEGR) deal a day after they sold debt in Europe. The remainder of Tuesday's transactions were below $ 1 billion in market and the Texas Instruments deal was particularly small.

Both the SIEGR and NatWest (NWG) 6n5 were priced attractively.

As noted yesterday, six issuers sold the equivalent of €9.5 billion in bonds, while the four issuers mentioned above issued $11 billion. Since the earnings season began on April 14, approximately $184 billion in non-Big 6 bank bonds have been raised in USD and European markets. The U.S. share, at roughly 55% of the total supply from the world's largest issuer over the past six weeks, is near a 10-year low. This reflects increased capital formation outside the U.S., likely driven by uncertainty surrounding trade discussions.

Systematic Trading Model Indicators and Trading Strategy - Wednesday

The most significant long trading opportunities are now getting attractively priced new issues. Secondary long opportunities require wider spreads, and attractive short opportunities need tighter trading levels to be actionable.

Of the 434 bonds trading at extreme levels (long and short), the 357 attractive short trading indicators account for 82.3% of the total. However, the current number of short indicators is 37% below the historical average. Meanwhile, de-leveraging issuers, such as Siemens (SIEGR) and NatWest (NWG), have issued bonds at attractive levels for long positions.

Systematic Trading Strategy for Tuesday May 21

The model advises selling long positions when they reach the "avoid trading" level and delaying larger short positions until the number of attractive short indicators reaches 400.

Long Positions

Focus on attractive bonds (or new supply) from issuers that have already reported earnings. For fixed-coupon bonds, prioritize issues with a size exceeding $1 billion.

Short Positions

Target issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet.

Systematic Credit Indicators

Systematic credit trading employs defined back-tested trading processes and portfolio construction algorithms based on issuer reported and market trading parameters. This clarity differentiates them from discretionary approaches, offering replicable and auditable methods. We target ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.

Most Recent Model Trading Indicators

The HSBC (A3/A-) HSBC 5.79 05/13/36 reached its avoid trading level Monday. The new Siemens (Aa3/AA-) SIEGR 5.8 05/28/55 and NatWest (A3/BBB+) NWG 5.115 05/23/25 are attractive new issues as model Indicators we publish this AM.

Friday Sample Trading Indictors Credit Spread Movement

Since January 4 of this year we have published 104 trading Indicators or about 1% of the total indicators from our systematic trading model

• 57 of 77 attractive long indicators have reached their avoid-trading level and tightened by (-9.05bp) on average

• 24 of 27 attractive short trading indicators have reached their avoid-trading level and widened by (+5.3 bp) on average.

• The remaining 21 long indicators credit spreads have widened by (+2.75bp) on average.

• Across all 104 indicators, credit spread movement has been +/- 5.64 bp in the direction of the indicators.

Earnings reports from Yesterday

Vodafone (VOD, Baa2/BBB)

• Vodafone (VOD) reported year-end 2025 loss of -€1.48 bil vs +€1.62 billion in FY2024 as -€4.5 bil of non-cash German and Russian asset impairments were recorded post the Vodafone Italy sale to Swisscom in January 2025. Total revenue increased 2.0% to €37.45 billion.

• Financial Position: Post the €8 billion sale of Vodafone (VOD) Italy, the company saw FCF of €2.5 billion, which was slightly lower YoY. VOD net debt decreased to €22.4 billion from €33.2 billion as at 31 March 2024, primarily driven by the proceeds from the sale of Vodafone Spain for €4.1 billion and Vodafone Italy for €7.9 billion, as well as the 10% stake in Oak Holdings for €1.3 billion, offset by equity dividends of €1.8 billion and the share buyback of €1.9 billion. The capital returned to shareholders in FY25 totalled €3.7 billion, and the company announced another €2 billion for the first half of 2025.

• Model Trading Indicators: Just 2 of the VOD USD-denominated bonds are considered undervalued (VOD 5 05/30/38 and the VOD 7 04/04/79 Perp) by our trading model, and none of the 18 bonds are considered an attractive long trading indicators at current levels. Our trading model views Vodafone (VOD) LN equity as unattractive at Tuesday's closing price.

Home Depot (HD, A2/A)

• Home Depot (HD) reported 1Q comparable store sales -0.3%, and comparable sales in the U.S. increased 0.2%. 1Q total sales growth was 2.8%, and the company opened 13 new stores. Earnings fell (-3%) YoY in the quarter.

• HD is less vigilant about balance sheet management than Pepsi. HD has grown its shareholder return by 12% per annum over the past 10 years, and HD equity has recorded a 15% average annual return during that period. Over the past 10 years, the HD balance sheet has grown 350%, and net debt is now $50 billion.

• Model Trading Indicators: 14 of the 40 HD USD-denominated bonds are considered attractive short trading indicators, with the HD 4 1/2 09/15/32 and HD 4.95 06/25/34 the most attractive. The trading model does not see HD equity as an attractive long or short trading indicators at last night's closing price.

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.