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Thu, June 5, 2025

Systematic Credit and Equity G-250 Trading Indicators for June 5, 2025

Market Rally and Risk-On Sentiment

On Tuesday, equity and corporate debt markets rallied following a better-than-expected April JOLTS jobs report. On Wednesday, the UST market surged after the ADP private payroll data for May showed the lowest reading in two years. U.S. equities traded higher for most of the day, reflecting persistent "risk-on" sentiment. Why? A key driver is the $6.7 trillion in money market balances, still $3 trillion above pre-2020 levels due to PPP loan forgiveness, three stimulus programs, and 0% overnight interest rates.

In the current "Trump show," headlines often overshadow actual data. The Fed is now likely to cut interest rates at its September meeting, spurred by Wednesday's weaker-than-expected ADP report.

Our quantitative long/short model, covering global issuers with over $15 billion in tradable debt, identifies trading opportunities from market reactions to headlines or data. Wednesday's headlines shifted treasury prices and credit spreads, slightly adjusting our model's trading indicators.

Jobs and Inflation Outlook

Last week, we noted that weekly jobless claims, reported by states, strongly correlate with the U.S. Labor Department's monthly unemployment rate. If today's weekly jobless claims exceed 230,000, the May unemployment rate, reported tomorrow, could rise to 4.3% or 4.4%, depending on seasonal adjustments. Whether risk markets interpret a higher unemployment rate as a signal for a July Fed rate cut remains uncertain. Today, Challenger, Gray & Christmas will release May job layoff announcements.

Our model's trading indicators shifted slightly on Wednesday. The 71 attractive long indicators align with the June 2023–June 2024 average, while the 417 attractive short indicators are 3% below the two-year average.

Corporate Debt and Balance Sheet Trends

Global balance sheets continue to grow, primarily to fund shareholder returns. In the March–April quarter, 234 global issuers reporting results added $1 trillion in net debt (up 8%), while revenue grew by 4% and cash flow even less. This trend suggests that attractive short indicators may increase, driven by rising share repurchases and dividend hikes, while Q2 (June–July) revenue growth is expected to slow year-over-year.

Notably, banks and utilities—regulated entities comprising two-thirds of global corporate debt—face constraints on balance sheet leverage. Financial stress in the corporate bond market is more likely in non-financial sectors with overextended issuers or in private credit markets where capital access could tighten.

Our credit trading model indicates that overall credit is at the lower end of the "overvalued spectrum," with just over 400 attractive short indicators out of 3,000 possible issuers. Historically, short indicators have remained above this level for periods exceeding 100 calendar days (67 trading days). Today marks the first new short indicators in nearly a month.

Inflation, Economic Data, and Interest Rates

The Bank of Canada held interest rates at 2.75%, citing uncertainty over U.S. tariffs. The S&P U.S. Services PMI rose to 53.7 in May (preliminary 52.3) from 50.8 in April, though below last year's 54.8. Prices charged surged to 58.6, the highest since August 2022, up from 53 in April.

Our preliminary, non-seasonally adjusted CPI estimate for next Wednesday projects a year-over-year total CPI increase of 2.5%. However, healthcare, employment, electricity, and apparel pricing may push core CPI closer to 3.0%, depending on seasonal adjustments. Fed Governor Waller's comments on "progress toward" the Fed's inflation goal contrast with the market's reaction to the ADP data, highlighting a disconnect.

U.S. weekly rail traffic for May 31, 2025, rose 2.2% year-over-year to 459,884 carloads and intermodal units. Carloads increased 6.6% to 219,599, while intermodal volume fell 1.5% to 240,285. Rail traffic correlates strongly with GDP, but Q2 data suggests slower, not negative, quarter-over-quarter growth.

Earnings Season Insights

Broadcom (AVGO) reports today. As noted, global corporate balance sheets are rapidly accumulating debt, often to fund shareholder returns. Dividend growth data for UK and Japanese banks in Q1 2025 is incomplete, as not all report quarterly cash flow. We'll revisit this after Q2.

Our model recently issued attractive long indicators for 12 issuers in the UK, Japan, Canada, and France. Tomorrow, we'll detail the French banking balance sheet. Collectively, these three banking groups hold $355 billion in net cash, representing 15% of the largest global issuers' balance sheet debt and one-third of their liquidity. These deleveraging banks, with more cash than debt, are overweighted in our model, while U.S. and most Australian bank bonds are attractive shorts at tighter spreads.

Globally, the largest corporate debt issuers hold $11 trillion in liquidity against $17.2 trillion in debt. However, 41 non-U.S. banks have $7 trillion in liquidity versus $7.16 trillion in debt and $21 trillion in deposits. The remaining 191 issuers, including U.S. banks, have $4 trillion in liquidity against $10 trillion in debt—a ratio deteriorating rapidly.

Wednesday's US Investment-Grade and High Yield Credit Trading

Trading volume was 18% below average. G-254 issuers accounted for 85 of the top 100 traded bonds, representing 91% of top 100 issuer volume and 70% of total TRACE volume.

  • Market Movement:

    • U.S. CDX Index widened by 0.5 basis points to 55.5.

    • U.S. IG cash spreads ranged from 1 basis point tighter to 2 basis points wider.

    • U.S. financials and industrials outperformed, while Asian banks underperformed.

Dealers bought over $1 billion in high-yield bonds for the second consecutive day, including DISH (attractive short prior to EchoStar's coupon delay), Rivian Holdings (RIVHOL), and CEMEX (CEMEX) Perp. Only DISH is in our trading universe.

Dealers also purchased over $1 billion in investment-grade bonds, with top new supply from GE Healthcare (non-G-254) and Bank of New York (BK, attractive long). End users heavily bought United Healthcare (UNH, attractive short at tighter levels) and Ford (F, attractive short at tighter levels).

Attractive trading sectors

Long Opportunities

  • None – there are only 270 bonds considered undervalued ($390 billion) and 68 considered attractive long trading indicators ($98.5 billion) by our trading model

Short Opportunities

  • U.S. Big 6 Banks (All Ratings): $654.2 billion in overvalued market capital across 252 bonds, with 79 short indicators.

  • Energy (All Ratings) : $192.7 billion in overvalued market capital across 132 bonds, with 74 short indicators.

  • BBB TMT: $193.8 billion in overvalued market capital across 111 bonds, with 39 short indicators.

  • Single A Healthcare: $117.7 billion in overvalued market capital across 82 bonds, with 24 short indicators.

Issuer News

  • Starbucks (SBUX): Starbucks is consolidating its global brand and coffee teams to focus on coffee as the core of its menu, product innovation, and marketing, aiming to boost comparable store sales, which have been weak over the past six months.

  • Apple (AAPL): A San Francisco federal appeals court denied Apple's request to pause a court order mandating that App Store developers can direct users to web-based payment options for in-app purchases without paying Apple's commission.

  • UniCredit (UCGIM): UniCredit withdrew its request for interim measures to facilitate "constructive" discussions with Italy regarding conditions for its Banco BPM bid, per a company statement.

U.S. IG Credit Valuation and Spreads

Bloomberg's index includes new bond supply in a non-systematic, non-mathematical way, leading to inconsistent spread readings. Our trading model, utilizing stochastic finite mathematics with over 95% probability outcomes, indicates that U.S. investment-grade (IG) credit is not at the "bottom rung" of the overvalued spectrum.

Global Equity Correlation to IG Credit Spreads

U.S. equities and IG credit spreads were unchanged on Wednesday, consistent with 27 of the past 30 days showing modest correlation between U.S. IG credit spreads and S&P 500 closing prices. Technology accounts for 31% of S&P 500 market capitalization but only 8% of global top issuer debt. Year-over-year non-U.S. corporate bond purchases are down approximately 44%.

New Supply / Bond Maturities / Credit Fund outflows for June

June is projected to have above-average new bond supply, but this week's G-254 USD supply has been unattractive.

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Macquarie Bank (MQGAU): Issued a $1 billion, 3-year floating-rate note on Wednesday at an improved spread.

Royal Bank of Canada (RY): Priced a perpetual bond offering at 6.75%, deemed unattractive by our trading model.

In Europe:

NatWest Markets PLC (NWG, A1/A): Sold a €1 billion, 3-year floating-rate note (3mE+60) following a USD offering two weeks ago.

HSBC: Issued €5-year covered bonds.

Italy: Launched a €17 billion offering in Europe on Wednesday.

Systematic Trading Model Indicators and Trading Strategy - Thursday

This morning's model output:

  • 419 attractive short indicators, +67 from Wednesday morning and the highest since 2/24.

  • 71 attractive long indicators, +3 from Wednesday.

  • Of over 6,000 bonds in our research universe, 490 are trading near their 52-week tight or wide spread levels—13% below normal and 4% below the threshold for initiating short positions.

Systematic Trading Strategy for Thursday June 5

Strategy: Prioritize long positions in de-levering new issues with compelling valuations. With attractive short trading recs now over 400, the model suggest shorting 1 issue from the most overvalued sector – Big 6 banks.

Systematic Credit Indicators

Systematic credit trading Our 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 managing volatility risk.

Most Recent Model Trading Indicators

  • Union Pacific (UNP, A3/A-) UNP 5.6 12/1/54 is 1 of 10 new issue model indicators published prior to February 23, 2025 that has not reached its avoid trading level.

  • Today the trading model adds the new Macquarie (MQGAU, AA2/A+) 2028 new issue FRN as attractive long rec.

  • Today the trading model adds the Morgan Stanley A1/A- MS 2.943 01/21/33 @ 69/10Y as an attractive short indicators.

Sample Trade Performance Since January 4, 2025 (110 trades, 1% of total indicators):

  • 63/83 long indicators reached avoid-trading levels, tightening by -10.44 bp.

  • 24/27 short indicators reached avoid-trading levels, widening by +5.3 bp.

  • 21 remaining longs widened by +1.45 bp.

  • 3 remaining shorts tightened by -6.33 bp.

  • Average spread movement: ±6.86 bp in the indicated direction.

  • 79% of indicators reached avoid-trading levels (11% 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.