Systematic Credit and Equity G-250 Trade Indicators for May 29, 2025
On Wednesday, credit spreads widened slightly, reversing some of Tuesday's tightening as U.S. equity prices dipped following a significant rally. NVIDIA reported mixed Q1 2025 results but saw its stock rally post-earnings, driven by management's comments and a flat revenue growth outlook for Q2 2025. This mirrors the resilience seen in NVIDIA's stock during the February-to-April tariff-related equity pullback. Salesforce Inc. (CRM) and Hewlett Packard (HPQ) also reported, revealing slowing revenue growth and cautious outlooks. Notably, none of these companies are among the world's largest corporate debt issuers, despite NVIDIA's strong 26% earnings growth in Q1 2025.
Broader economic indicators, including Federal Reserve District surveys (ISM and PMI), signal slowing revenue growth and rising costs. Our credit trading model, based solely on publicly reported data, projects 5% YoY revenue growth and less than 5% YoY earnings growth for the world's largest corporates in Q1 2025.
Meanwhile, share repurchases and dividend payouts are growing at nearly 12% YoY. Companies like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Meta (META) maintain robust cash flows and large cash reserves, enabling increased shareholder payouts. However, the majority of the top 250 global (G-250) corporate issuers are relying on balance sheet debt to fund dividends and buybacks. This trend, ongoing for six quarters, has added over $1 trillion in net debt to G-250 balance sheets in the past year.
Despite lowered revenue guidance, NVIDIA trades at 45x forward earnings, Salesforce at 40x, and HPQ at 9x declining forward earnings. High-growth "haves" (e.g., tech firms with double-digit revenue growth and shareholder payouts) trade at near-historic valuation highs. In contrast, "have-nots" with low or declining revenue growth—such as General Motors (GM) at 5.5x, PepsiCo (PEP) at 15x, and JPMorgan (JPM) at 14x forward earnings—trade well below the S&P 500's 29x P/E ratio. Corporate credit spreads, however, show less differentiation. Spreads for names like Bank of America (BAC) and JPMorgan correlate strongly with equity prices, while TMT (Technology, Media, Telecom) spreads are not significantly tighter YoY, despite 5-10% higher equity prices on average.
Overall, corporate credit appears slightly overvalued and may trend further toward overvaluation as long as U.S. tech equity prices remain near all-time highs.
Inflation, Economic Data, and Interest Rate Outlook
The Richmond Fed Manufacturing Survey for May reported declining order backlogs and new orders for the second consecutive month, with local business conditions at multi-year lows and wage expenses at a four-year high. Prices paid were double the 2024–2025 average, while prices received were 30% above average.
The Dallas Fed Services Outlook for May showed contracting business activity, though at a slower pace than in March and April. Input and sales prices remained elevated but below prior months, with revenues declining for the first time in four years.
Redbook same-store sales rose 6.1% in the week ending May 24 compared to the prior year, with month-to-date sales up 5.6%.
Earnings Season Insights
Yesterday's earnings from non-G-250 TMT issuers (NVIDIA, HPQ, Salesforce) highlighted slowing revenue growth alongside increased share repurchases and dividends (see page 6). Upcoming reports from Royal Bank of Canada, Nationwide UK, Hewlett Packard Enterprise (HPE), Dell Technologies (DELL), AutoZone (AZO), Best Buy (BBY), Costco (COST), and Gap (GPS) will provide further insight into the U.S. economy's health.
Non-U.S. banks, holding nearly 40% of G-250 corporate debt and substantial cash reserves (representing 60% of G-250 liquidity and 75% of global bank liquidity), remain critical. Among the 188 non-financial and U.S. financial G-250 issuers reporting detailed cash flow, Q1 2025 dividends and share repurchases totaled $574 billion (up $65 billion YoY), while net debt rose by $629 billion YoY. Shareholder returns grew 12.75% YoY, outpacing 4.9% YoY revenue growth.
Wednesday's US Investment-Grade (IG) Credit Trading
U.S. dollar trading volumes were 12% below average on Wednesday. Of the top 100 issuers traded, 88 were G-250 issuers, representing 97% of the top 100 and 68% of all bonds traded. Financials accounted for 33% of trades, with non-financial issuers AT&T (T), Oracle (ORCL), and General Motors Financial (GM) among the top 10 traded. Dealers traded just over $1 billion in IG bonds, with Big 6 banks comprising six of the top nine issuers purchased by end users.
Market Movement
U.S. CDX index unchanged at 56 basis points (bp).
U.S. IG cash spreads remained stable.
Technology, Media, and Telecom (TMT) and Energy sectors outperformed, while Financials and Consumer Discretionary (e.g., Autos, Starbucks (SBUX), Home Depot (HD), Royal Caribbean (RCL)) underperformed.
Attractive trading sectors
Long Opportunities
Single-A and BBB TMT: $95.4 billion in undervalued secondary capital across 57 bonds.
Yankee/Euro Banks: $53.6 billion in undervalued secondary capital across 40 bonds.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $630.1 billion in overvalued market capital across 241 bonds, with 58 short indicators.
Australian Banks: $67.7 billion in overvalued market capital across 59 bonds, with 15 short indicators.
Single-A Healthcare: $113.4 billion in overvalued market capital across 79 bonds, with 26 short indicators.
Issuer News Wednesday
Williams Cos. (WMB): Plans to revive two cancelled pipelines—Constitution Pipeline and Northeast Supply Enhancement—to deliver natural gas to New York
.
Chevron (CVX): Plans to lay off nearly 800 employees in its Permian Basin operations, primarily at its Midcontinent campus in Texas, effective July 15, 2025.
BP (BPLN): Castrol lubricant business, valued at $8–10 billion, is attracting interest from energy firms and buyout groups, including Reliance Industries, Apollo Global Management, and Lone Star Funds, with initial bids expected soon.
U.S. IG Credit Valuation and Spreads
Our trading model indicates U.S. IG credit is "slightly overvalued" and trending toward "overvalued." Credit spreads are wider year-over-year (YoY), but with over half of the world's largest corporate debt issuers increasing leverage, attractive short recommendations cover less than 11% of bonds from re-leveraging issuers. Note: This analysis uses Bloomberg index data, which may differ slightly from other credit indices. YoY LQD returns are +5.7%, while U.S. Treasury yields are approximately 26 bp higher YoY.
Global Equity Correlation to IG Credit Spreads
On Wednesday, May 28, 2025, USD credit spreads moved in the same direction as USD equity index prices for the 14th day in 2025. While US equities are up 10% year-over-year (YoY), US credit spreads have widened, with the extent depending on the index data used. The magnitude of daily credit spread changes (tighter when equities rise, wider when equities fall) has lagged equity price movements, particularly on the upside, due to:
US credit fund outflows in April.
Increased leverage among the world's largest balance sheets.
Use of proceeds for general corporate purposes, primarily shareholder returns.
Weak foreign demand for USD corporate credit.
New Supply / Bond Maturities / Credit Fund outflows for May
USD G-250 Supply
On Wednesday, only one USD G-250 deal was issued: AT&T (T, Baa2/BBB) priced $3.5 billion in 5Y, 10Y, and 30Y bonds, marking its first USD market issuance since August 2021. None of the tranches were priced aggressively, but the 5Y and 10Y bonds were identified as attractive longs by our credit trading model.
New Euro G-250 supply on Wednesday:
Banque Federative du Credit Mutuel SA (BFCM, A1/A+)
£400m 6Y Sr Pref Fixed at +110
Danske Bank A/S (DANBNK, Baa1/A-)
£300m NC5 SNP Fixed (Oct. 4, 2031) at +120
Australia & New Zealand Banking Group Ltd (ANZ, Aaa/AAA)
€650m 3.25Y Fixed @t MS+55
€500m 6.25Y Fixed @ MS+90
Deutsche Post AG (DHLGR, A2/A- )
€900m 7Y Fixed @ MS+83
ABN AMRO Bank NV (ABNANV, Aa3/A)
€1b 4Y Green Sr Pref Fixed @ MS+65
Since the start of earnings season on April 14, 2025, G-250 issuers have issued €98 billion and £21 billion ($137 billion equivalent) in Euro and Sterling bonds, compared to $132.6 billion in USD by G-250 issuers. Foreign demand for USD new supply remains weak.
Systematic Trading Model Indicators and Trading Strategy - Thursday
This morning's model generated:
324 attractive short indicators, the highest since late February, but 25% below average.
69 attractive long indicators, the lowest since January 2, 2025.
Of over 6,000 bonds in our research universe, 393 are trading near their 52-week tight or wide spread levels, 29% below normal and 20% below the threshold for adding short positions.
Systematic Trading Strategy for Thursday May 29
The model indicates adding long positions in de-levering new issues with attractive valuations. It will delay adding short positions until short indicators reach 400 and systematic credit spreads enter the "overvalued" range.
Systematic Credit Indicators
Systematic credit trading uses predefined, back-tested processes and portfolio construction algorithms driven by issuer-reported data and market trading parameters. Unlike discretionary approaches, it offers replicable and auditable methods. Our model targets ±5 basis points of credit spread movement in minimal trading days, optimizing returns while managing volatility risk.
Most Recent Model Trading Opportunities
New Indicators: Add AT&T (Baa2/BBB) T 5.375 08/15/35 as an attractive long.
Performance Since January 4, 2025:
Of 108 indicators (1% of total model indicators):
60 of 80 long indicators reached avoid-trading levels, tightening by an average of -10.7 bp.
24 of 27 short indicators reached avoid-trading levels, widening by an average of +5.3 bp.
21 remaining long indicators widened by an average of +2.43 bp.
3 remaining short indicators tightened by an average of -4.66 bp.
Overall, credit spread movement averaged ±6.64 bp in the direction of indicators.
78% of indicators reached avoid-trading levels, 12% below normal.
Corporate Updates
Salesforce Inc. (CRM, A1/A)
Q1 Results: 8.5% revenue growth, 4% cash flow growth YoY. Returned over $3.5 billion to shareholders, with over $6 billion in cash generated.
Informatica Acquisition: $8 billion cash deal, funded by $16 billion in cash and short-term investments. CRM's $8 billion debt is unlikely to reach the $15 billion threshold for our systematic trading universe.
Hewlett Packard (HPQ, Baa2/BBB)
Q2 Results: 3% revenue growth, negative cash flow after capex. Continues to re-lever its balance sheet, returning ~$400 million per quarter to shareholders. Total debt exceeds $10 billion but is unlikely to enter the systematic trading universe without an acquisition.
NVIDIA (NVDA, A1/A)
Q1 Results: 69% revenue growth, 29% operating earnings growth YoY. Gross margin fell 18% to 61% due to $4 billion in H20 charges. Management expects 70% gross margin in Q2 with 1-2% QoQ revenue growth.
Financials: $8.4 billion in debt, $53.5 billion in cash and short-term investments. Q1 cash flow from operations was $18.8 billion (vs. $14.8 billion in Q1 2024). Returned $14.35 billion to shareholders (vs. $7.76 billion in Q1 2024).
Bank of Montreal (BMO, A2/A- Holdco)
Q2 Results: 9% revenue growth, 13% net interest income growth, 4% non-interest revenue growth, and 6% net income growth YoY. Share buybacks increased by 90% despite negative cash flow from operations. Loan book and deposits are shrinking, with deposits declining faster, boosting net interest income. Net loan charge-offs rose 30% but remain below COVID levels.
Financial Position: 13.5% CET1 capital ratio, but leverage is increasing due to deposit outflows and higher share repurchases/dividends. Q2 deposit outflow was ~$40 billion.
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.