Systematic Credit and Equity G-255 Trading Indicators for August 21, 2025
Good morning, Our trading model's attractive short indicators dropped to 998, down 46 from Wednesday. While the systematic trading overall credit indicator remains "overvalued," we are far from returning to "extremely overvalued." Trading volumes were 15% below average as markets approach the Jackson Hole symposium, the UK bank holiday on Monday, and Labor Day week.
Market Credit indicators – still tighter.
Despite reduced but positive ETF corporate weekly fund flows, the trading model's credit market indicators signal "higher and tighter" for high-yield and investment-grade bonds. The key question is whether yesterday's "buy the dip" in US equities, which saw the S&P 500 (SPX) rally 60 points from its low between 11:00 AM and 3:45 PM, will hold.
Testing the Trump trade
The -75 point decline in the SPX on Wednesday morning remains a focal point. We previously discussed tariffs, geopolitical tensions (e.g., Putin, NATO), and their impact on the global economy and corporate earnings. The timing of yesterday's decline and subsequent rally aligns with the close of non-US markets. Notably, we have not yet observed non-US entities withdrawing capital from US markets. The "buy the dip" strategy will be tested during this quieter period, with fewer traders active due to holidays and the Jackson Hole event.
While markets anticipate the Federal Reserve's statements at Jackson Hole, no firm conclusions on US interest rate trends are expected until September 5, when the non-farm payrolls report—a heavily seasonally adjusted figure—is released.
More Earnings Confusion
Yesterday, we highlighted John Deere (DE: A1/A, attractive short for both equity and debt) and Home Depot (HD: A1/A, attractive short for both debt and equity) due to their market valuations.
Lowe's reported results slightly better than Home Depot's, with three notable distinctions:
Lowe's is rated BBB+ and has been deleveraging for the past eight quarters.
The company announced a $8.8 billion cash acquisition of Foundation Building Materials, shifting its focus from retail to professional customers.
Lowe's operating cash flow continues to grow.
Lowe's trades at a significant discount to Home Depot (21x earnings) with a similar forward outlook, including limited new store openings and a 1% comparable store sales growth rate.
Model Indicators
Long LOW Equity: At $241 per share – Avoid LOW bonds at current levels, but the new supply should be attractive.
We Expect Credit Spreads to continue tighten – How to trade this?
Follow the Trend: When the overall short trading indicators reach 1,100, with falling equities and negative money flow, opportunities will emerge for long-only traders to move to cash and for long/short traders to short credit.
Short Opportunities: US Big Six Banks and US Single A Energy sectors are the best short bets when conditions align.
Long Opportunities: UK Banks, Single A, and BBB TMT sectors will be the most attractive longs after spread widening.
Of $303 billion in USD trading capital, only $22 billion (e.g., Nationwide NWIDE, attractive short; Santander SANUK, attractive short) has an issuer short trade indicator as of August 20. UK banks have a 92% attractive long indicator ratio, the highest in our trading universe. Full details are available in the attached UK Model Trading Earnings Digest.
For access to individual credit curves covering all 237 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
Minutes from the July meeting of the July US Federal Reserve were released on Wednesday indicating the majority of Governors saw inflation as a greater risk than unemployment.
Building permits fell to 1,354k vs 1,393k Lowest since June 2020
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -15% above average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -21% below average
-G-255 Issuers: 16 of the top 25 traded bonds accounted for 58% of top 25 issuer volume and 49% of total TRACE volume.
Market Movement
U.S. CDX Index: +.3 @ 50.7bp
U.S. IG Cash Spreads: were (+1 to +3bp) wider to with IG Financials underperforming a second day.
CDX HY Index: -.1 @ 107.1 (per Bloomberg).
HY Cash Bonds: BB Energy outperformed and Consumer bonds were lower Wednesday.
High-Yield Activity
- Dealers bought $300mm of HY bonds Wednesday.
Most Bought HY Bonds
- JH North America (TDG Ba3/BB-)
Most Sold HY Bonds
- Transdigm Inc ( B3/B)
Investment-Grade Activity
- Dealers sold $200mm of IG bonds Wednesday.
Most Bought Sector: Big 6 banks
- JP Morgan (JPM A1/A attractive short )
- Morgan Stanley (MS A2/A attractive short)
Most Sold Sector: Yankee Banks
- UBS (UBS, A1/BBB+ attractive short)
- Barclays (BACR, 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 140 bonds ($212.5 billion) are considered undervalued by the stochastic credit trading model, with 50 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1481 bonds ($1.686 trillion) are considered overvalued by the stochastic credit trading model with 998
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $724.8 billion in overvalued market capital across 290 bonds, with 196 short indicators.
Single A Industrials: $115.8 billion, in overvalued market capital across 102 bonds, with 86 short indicators.
Single A and BB Energy $177.2 billion in overvalued market capital across 107 bonds, with 79 short indicators.
Single A Healthcare $170.6 billion in overvalued market capital across 116 bonds, with 95 short indicators.
Issuer News
Intel Corporation Developments Intel Corp. (INTC Baa2/BBB, Attractive Short): The U.S. government plans to acquire a stake in Intel, providing a significant backer, but unlikely to change the current Intel outlook
Lowe's Cos. Acquisition Lowe's Cos. (LOW Baa1/BBB+, Attractive Long): Agreed to acquire Foundation Building Materials for approximately $8.8 billion in cash to enhance its focus on professional customers.
Nissan Motor Co. Asset Sale Nissan Motor Co. (NSANY Ba1/BB+, Attractive Long): KKR & Co. has emerged as the leading bidder to purchase Nissan's global headquarters for approximately ¥90 billion. Deal Structure: Includes leasing the office back to Nissan for 10 years.
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 7th consecutive trading day as US equities were lower and US IG spreads were wider. More specifically as US bank equities pulled back over the past 3 trading days.
New USD G-255 supply and fund flow data
Two additional G-255 issuers sold bonds on Wednesday:
Nordea (NDAFH Aa3/AA-): Issued 3-year senior preferred fixed/floating-rate notes (FRN) in the first transaction from a Nordic bank since earnings were reported (see our Nordic bank earnings digest from August 18, 2025). Despite Nordea's re-leveraging, these senior non-preferred bonds were attractively priced.
Athene Global (ATH A1, A+) sold 10Y secured bonds at a VERY attractive spread. However, Athene is a "habitual issuer" of corporate debt, but do not issuer secured bonds as often.
Fund flows for the week ended August 18 were:
Corporate bond ETFs dropped to $3.76 billion from $5.78b week over week
Investment-grade ETFs fell to $3.092 bill from 5.41bil in the week ended August 13
High Yield ETFs inflow rose to 667.7mm from $569.9m WoW.
Month-to-Date (MTD) and Year-to-Date (YTD) Bond Supply
MTD (G-255): 31 issuers sold USD debt totaling $49.725 billion across 72 trades, with 81% of the volume from these trades.
YTD (G-255): Supply reached $728.64 billion, 9% below 2024 totals as of the third week of August. Non-financials accounted for 51% of total supply.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 998, down 46 from Wednesday. The systematic credit market indicator remains overvalued
Attractive long indicators: 50, down 1 from Wednesday, 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, 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 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 20, 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. Thursday 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
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 20, 2025)
Total Trades: 146 (1% of total trades).
Performance Summary:
Long Indicators: 109/113 reached avoid-trading levels, tightening by -9.57 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 5 tightened by -3.56 bp.
Remaining Shorts: 5 tightened by -17.84 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: (20.5 trading days) normal.
Lowe's LOW Baa1/BBB+ attractive long ) Earnings Summary:
Lowe's reported 2Q 2025 revenue that rose .9% YoY while reported profit that grew 5.6% YoY.
2Q 2025 Performance:
Revenue: Up 0.9% YoY.
Profit: Up 5.6% YoY.
Comparable Store Sales: Up 1.1% YoY.
Average Ticket: Up 1.2% YoY.
Store Expansion: 2 new stores opened YTD, with 5–10 planned for 2025.
2025 Guidance: Operating margin of 12.2–12.3%, total comparable store sales growth of 1%.
Financial Position
First Half 2025:
Operating Cash Flow: Up 3% YoY to $7.5 billion.
Free Cash Flow (After Capex): Down to $5.3 billion from $6.6 billion in 1H 2024.
Total Debt: Flat QoQ, down $4.1 billion YoY.
Net Debt: Down $3.1 billion YoY to $29.4 billion (no share repurchasing in 1H 2025).
Trading Model Indicator: 28 of the 38 LOW secondary USD bonds have a market capitalization of $750 million or more. 1 Lowe's bond carries an undervalued indicator and 1 carries an attractive long trading indicator (both within 18 months of maturity).
Equity Indicator: LOW equity is a long trade @ $241 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.