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Tue, August 26, 2025

Systematic Credit and Equity G-255 Trading Indicators for August 26, 2025

The G-255 Trading & Research Universe

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.

Good morning, Another curve-ball from the White House.

We won't delve into tariffs, the Intel "investment," or the President's decision to "fire" a Fed Board Governor while publicly criticizing their reputation—such events have become par for the course. From a systematic trading perspective, the key question is how risk markets will react and whether there's a quantitative trade to execute. Our trading model generated one new trade signal overnight.

Trading on Monday was light and unidirectional across markets. Notably, credit valuations remained largely unchanged. Our trading model added 10 short indicators but remains below the threshold where halting new long issue trades would be prudent.

Market Credit Indicators – Still Tighter

As noted on Monday, a combination of credit fund inflows, bond retirements (maturities and calls), and limited new supply suggests credit spreads and high-yield (HY) prices will continue to improve through at least Thursday. Monday's equity and credit selling did not materially impact valuations. The selling of Yankee financials, in particular, aligns with expectations given the rate cut signals from Jackson Hole, ongoing trade tariffs, and White House rhetoric. As highlighted on Friday, non-U.S. investors aren't withdrawing from USD assets but are reallocating cash into non-U.S. credit funds. Major U.S. fund firms, including BlackRock, offer Euro and U.K. options, such as the LQD ETF.

Model indicators for LQD

With earnings season concluded, shifting issuer outlooks, and some tariffs now implemented, our focus returns to updating model indicators. With a Fed rate cut looming, credit spreads tightening, and earnings behind us, we can now publish model indicators for a large long-only portfolio. According to our trading model, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is one of the best-managed long-only corporate bond ETFs.

Over the past four weeks, LQD has outperformed most corporate bond indices, showing material shifts in three key areas: (1) Credit Valuations, (2) Tariffs, and (3) Interest Rate Volatility.

Our systematic trading model covers 85% of the bonds held in LQD, tracking performance across all 45 trading sectors in the portfolio.

1. Interest Rate Risk

LQD was proactive, significantly increasing exposure to the 3-5 year investment-grade (IG) maturity sector in June. This strategy paid off, as LQD exhibited lower volatility than the broader corporate bond market over the past three months. As U.S. front-end credit spreads tightened and yields fell, LQD strategically exited several 2028 and 2029 maturities post-rally. The portfolio's coupon and maturity distribution makes LQD less volatile than the U.S. Treasury (UST) market on a daily basis.

2. Credit Risk

Earnings season, tariff impacts, and currency movements have influenced LQD's positioning:

  • Underweight: Yankee bonds, Yankee banks, financials, and BBB-rated securities.

  • Overweight: Technology, Media, and Telecom (TMT), Industrials, and Healthcare. Despite these shifts, only 35% of LQD's holdings are flagged as short or overvalued by our trading model—a testament to strong issuer selection. This leads to our first published trade indicator (disclosed separately).

3. Tariff Impact (The Trump Trade)

As tariffs are implemented, their impact on corporate issuers is becoming clearer, requiring adjustments to business plans. LQD's materially lower exposure to Yankee bonds compared to most corporate bond indices reflects its proactive incorporation of tariff risk.

Is LQD Well-Positioned for a Fed Rate Cut and Potential Credit Spread Widening?

Answer: LQD is in a stronger position than most corporate bond ETFs. Its strategic management of interest rate risk, selective issuer exposure, and tariff-related adjustments enhance its resilience in the current environment.

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 ±7.52 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.

Monday's U.S. Credit Trading

Investment-Grade (IG) Trading

-Volume: -2% below average

-G-255 Issuers: 92 of the top 100 traded issuer bonds accounted for 88% of top 100 issuer volume and 66% of total TRACE volume.

High-Yield (HY) Trading

-Volume: -30% below average

-G-255 Issuers: 14 of the top 25 traded bonds accounted for 40% of top 25 issuer volume and 33% of total TRACE volume.

Market Movement

U.S. CDX Index: +.5 @ 49.7bp

U.S. IG Cash Spreads: were unchanged

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

HY Cash Bonds: Energy outperformed and BB Financials were lower Monday.

High-Yield Activity

- Dealers bought $300mm of HY bonds Monday.

Most Bought HY Bonds

- Crescent Energy(CRGFYN B1/BB-)

Most Sold HY Bonds eded $25mm

- LBM Acquisition (USLBMH B3/B-)

Investment-Grade Activity

- Dealers bought $3.2 billion of IG bonds Monday.

Most Bought Sector:

- None

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 148 bonds ($220 billion) are considered undervalued by the stochastic credit trading model, with attractive 58 long trade indicators for the entire 6,000 USD bond universe.

Short Opportunities

  • 1535 bonds ($1.752 trillion) are considered overvalued by the stochastic credit trading model with 1059

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

  • U.S. Big 6 Banks (All Ratings): $730 billion in overvalued market capital across 292 bonds, with 185 short indicators.

  • Single A Industrials: $123 billion, in overvalued market capital across 110 bonds, with 86 short indicators.

  • Single A and BB Energy $166.6 billion in overvalued market capital across 104 bonds, with 74 short indicators.

  • Single A Healthcare $174 billion in overvalued market capital across 112 bonds, with 87 short indicators.

Issuer News

Keurig Dr Pepper Inc (KDP Baa2/BBB attractive short) acquisition of JDE Peet's NV for about $18 billion has now been confirmed.

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 +47 bp higher YoY and -30 bp YTD

Global Equity Correlation to IG Credit Spreads

U.S. IG credit spreads, HY prices and U.S. equity prices continue to correlate as US equities were lower and US IG spreads were higher and US high yield bonds were higher.

New USD G-255 supply and fund flow data

Skandinaviska Enskilda Bank was the only new G – 255 issuers to come to market on Monday. We wrote that the Nordic banks are well capitalizes (SEB Aa3/A+ has 17.5% CET1 capital) and use their balance sheet to return capital to shareholders. While Monday's new supply will be held in the US, it frees up capital held in Europe.

This is the second new offering from SEB in 2024 and just the sixth time in 5 years that the Bank has sold USD bonds. The deal was very attractively prices and although the SEB issuer indicator is a short trade, the new issue is attractive long in for the next 22 trading days.

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: 1059, +10 from Monday AM. The systematic credit market indicator remains overvalued.

  • Attractive long indicators: 5*, up 7 from Monday, now 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 39 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:

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. Tuesday'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

With no new supply expected this week – The trading model added to the (1) McDonald's (Baa1/BBB+) MCD 4.4 02/12/31 and (2) Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 with both issues trading behind new issue spread at Thursday's close.

On Monday the Deutsche Bank NY (Baa1/BBB) DB 4.95 08/04/31 secondary trade reached its avoid trading level.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 25, 2025)

Total Trades: 148 (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: 7 tightened by -1.83 bp.

  • Remaining Shorts: 5 tightened by -17.99 bp.

  • Average Spread Movement: ±7.52 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.

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.