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Wed, May 28, 2025

Systematic Credit and Equity G-250 Trade Indicators for May 28, 2025

US Risk Assets Rally Amid Tariff and Bank of Japan News

US risk assets rallied significantly on Tuesday, with US credit spreads tightening by 2–5 basis points and US equities rising 2% on news related to tariffs and the Bank of Japan. However, trading volumes across all risk categories remained below average, reflecting not an influx of cash into US equity futures and ETFs but rather a lack of sellers. Earnings reports? Unless the word "adjusted" is absent, they tend to attract little attention.

The tariff trade remains difficult to quantify in terms of earnings or securities valuations.

Japan vs. US Debt: No Clear Market Correlation

Japan's government debt stands at $8.5 trillion, compared to $36.2 trillion for US national debt. The "carry trade" is approximately $800 billion, while the average daily USD currency traded is $3 trillion. Is there a historical numerical relationship between Japan's debt-to-GDP ratio and US markets (currency, oil & commodities, USTs, US equities, or US corporate debt)? No.

So why buy stocks and credit on Japanese headlines? Why not?

Credit Trading Model: No Strong Signals

Our credit trading model, which evaluates opportunities nightly, showed no significant opinion on capital market reactions to headlines. On Tuesday, six of the world's largest borrowers entered the USD new supply market, but only two of 14 deals (with market capital of $1 billion) indicated lower volume and limited non-US interest in US corporate bond supply. Secondary US corporate bond volumes are now 15% below average since the market stabilization post-election. This decline in interest, particularly over the past two months, follows a trend that began after last year's Presidential election.

While we've frequently noted capital formation outside the US, foreign investors have not yet withdrawn capital from US markets. However, volume metrics suggest they are not adding to US positions either. Total long/short trading indicators are 36% below average, placing US credit in the middle of its trading range.

Inflation, Economic Data, and Interest Rate Outlook

Consumer confidence rose to 98.0 in May, up from 85.7 the prior month, according to the Conference Board. This exceeded the forecast range of 82.0–92.8 (median 87.1) from 50 estimates. Key metrics include:

  • Present situation confidence: 135.9 (vs. 131.1 last month)

  • Expectations index: 72.8 (vs. 55.4 last month)

  • Median inflation expectations: 5.3% (down from 5.9%)

While this marks a significant improvement, the overall confidence level of 98 aligns with the 200-month moving average over the past 25 years, similar to levels seen during the 2020 COVID period. During the 2023–2025 equity rally, monthly consumer confidence averaged nearly 109.

Earnings Season Insights

Bank of Nova Scotia (BNS) reported strong operating results but a 38% year-over-year increase in loan charge-offs, resulting in flat earnings despite 9% revenue growth. Credit quality remains robust, with BNS increasing its dividend, committing $1 billion to share repurchasing, and trimming its balance sheet. Upcoming earnings from four other Canadian banks, Nationwide UK, Hewlett Packard Enterprise (HPE), Dell Technologies (DELL), and NVIDIA (NVDA) will provide further global market insights. Non-G250 issuers like AutoZone (AZO), Best Buy (BBY), Costco (COST), and Gap (GPS) will offer a window into the US economy's health.

The proportion of issuers releveraging balance sheets remains near a five-year high at 54%, though this is sector-specific. Non-US banks account for nearly 40% of total corporate debt among the world's largest issuers, holding nearly as much cash and short-term investments as debt. This represents over 60% of the liquidity of the top 250 corporate debt issuers and 75% of global bank liquidity.

Tuesday's US Investment-Grade (IG) Credit Trading

USD trading volumes were 17% below average on Tuesday. Of the top 100 issuers traded, 87 were G250 issuers, accounting for 96% of the top 100 and 71% of all bonds traded. Financials comprised 33% of trades, while General Motors (GM) and Royal Caribbean (RCL) represented nearly 12% of trades, making them the second-largest traded sector. Dealers purchased $1.7 billion of IG bonds, with energy bonds being the most bought.

Market Movement

  • The US CDX index tightened by 3.5 basis points to 56.

  • US IG cash spreads tightened by 2–5 basis points.

  • Technology, Media, and Telecom (TMT) outperformed other sectors.

Attractive Trading Sectors

Long Opportunities

  • Yankee, Canadian, and US Regional Banks: $43 billion in undervalued secondary capital across 34 bonds.

  • Yankee/Euro Banks: $54.3 billion in undervalued secondary capital across 41 bonds.

Short Opportunities

  • US Big 6 Banks (All Ratings): $602 billion in overvalued market capital across 229 bonds, with 47 short indicators.

  • Single-A and BBB TMT: $277.6 billion in overvalued market capital across 159 bonds, with 39 short indicators.

  • Single-A Consumer: $75 billion in overvalued market capital across 59 bonds, with 28 short indicators.

Issuer News Tuesday

  • Nissan Motor Co. (NSANY): Nissan plans to raise over ¥1 trillion through debt issuance and asset sales to address a significant loan repayment due in 2026. The company is issuing convertible securities and bonds, securing a £1 billion syndicated loan, and selling stakes in Renault SA, AESC Group Ltd., and plants in South Africa and Mexico.

  • Chevron (CVX): The Trump administration granted Chevron Corp. a limited license to remain in Venezuela, permitting minimal equipment maintenance but prohibiting oil production in the sanctioned country.

  • British American Tobacco (BAT): BAT increased its offering of ITC Ltd. (Indian tobacco manufacturer) stock to approximately $1.5 billion, offloading 313 million shares (2.5% of outstanding shares) at 413 rupees each, a 4.8% discount to Tuesday's closing price. Proceeds will fund an additional £200 million in share buybacks, bringing BAT's 2025 total to £1.1 billion.

  • Exxon Mobil Corp. (XOM) entered exclusive talks to sell its entire 82.89% stake in French unit Esso SAF to North Atlantic France SAS.

U.S. IG Credit Valuation and Spreads

US investment-grade (IG) credit is "slightly overvalued" but remains more attractive than its average trading levels over the past two years and has improved over the past six weeks. Current credit spreads are closer to their 52-week widest levels (April 10, 2025) than their tightest levels over the past 52 weeks (November 12, 2024) or five years (February 22, 2025).

Global Equity Correlation to IG Credit Spreads

Increased leverage on large US corporate balance sheets, with roughly half allocated to shareholder returns, has weakened the correlation between US equities (up approximately 5% year-over-year) and US IG credit spreads (approximately 45 basis points wider year-over-year). While US credit spreads tracked equity prices for the 13th trading day in 15 on Tuesday, the trade's magnitude and volume showed limited follow-through.

New Supply / Bond Maturities / Credit Fund outflows for May

Tuesday saw 6 G -250 issuers sell 14 USD trades totaling $8.85 billion.

Equinor (EQNR) returned to the US market for the first time in five years, while Toronto Dominion (TD) issued $2 billion in USD banknotes. These transactions signal positive momentum for non-US issuers raising USD capital. However, with only two of Tuesday's 14 transactions reaching a market capitalization of $1 billion or more, questions persist about the appetite for additional non-US capital and US demand for non-US issuer supply.

In May, new G-250 supply totaled $96.6 billion, with 43% from non-financial issuers. For 2025, there have been 188 new G-250 USD issues across 471 transactions, totaling $406.1 billion, with 34.4% from non-financial offerings.

Systematic Trading Model Indicators and Trading Strategy - Wednesday

Post-Tuesday trading and dealer marks, the credit trading model generated 130 attractive short trading indicators, the highest since late February, yet the total of 284 indicators remains 34% below average. Meanwhile, Tuesday's 71 attractive long indicators were the lowest since January 2, 2025. With only 5.8% of systematic trading near its 52-week tight or wide spread levels, a 10% movement in either direction is needed to trigger significant long or short trading indicators.

Systematic Trading Strategy for Wednesday May 28

With attractive long trading indicators 42% below average and short indicators 34% below average, credit spread or price movement in either direction could create more directional trading opportunities. US Big 6 banks are approaching a threshold where they may become an attractive sector for short trading opportunities.

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 Indicators

Siemens (Aa3/AA-) SIEGR 5.8 05/28/55 reached its avoid trading level on Tuesday

This morning we publishing model indicators adding Toronto Dominion (A2,A-) TD 4.574 06/02/28

Tuesday Sample Trading Indicators and Credit Spread Movement

Since January 4 of this year we have published 107 trading indicators or about 1% of the total indicators from our systematic trading model

• 59 of 79 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 (+2bp) on average.

• The remaining 3 short indicators credit spreads have tightened by (+3.7bp) on average.

• Across all 107 indicators, credit spread movement has been +/- 5.77 bp in the direction of the opportunity.

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.