Systematic Credit and Equity G-250 Trading Indicators for June 9, 2025
Friday's risk markets (US equities, interest rates, corporate credit, and commodities) exhibited a "risk-on" sentiment. Analysts and news sources cited varying expectations for Federal Reserve actions, ranging from no rate cut in September to two potential cuts (including September).
Employment Data Context
May employment data is challenging to interpret due to seasonal adjustments for school-year workers and hospitality hiring. As noted previously, while we avoid speculation, significant data releases between now and September will likely overshadow May's data in influencing the Fed's September 17 policy decisions.
Quantitative Data
Have stocks ever traded near all-time highs while earnings estimates declined and interest rates remained elevated? Historical data confirms this occurred five times: 2007–2008 (US credit crisis), 2011–2012 (EU credit crisis), 2015–2016 (commodity credit crisis), and 2018 (tariff crisis, twice). The current market differs, with US equities trading at 29x forward earnings amid declining estimates.
Capital Flows and Market Dynamics
Non-US markets have seen capital growth without significant capital flight from the US. Cash in US money market funds has declined by $400 billion year-over-year to $6.8 trillion, alongside lower trading volumes in most US risk markets. The "Trump Trade" (buying on headlines) continues to drive market movements.
Tariff and Trade Policy Outlook
The impact of tariffs remains uncertain. Large multinationals are delaying US capital decisions until trade policies are clarified and markets (financial and consumer) respond. Using a baseball analogy, we are in the early stages—roughly the second inning.
Valuation and Market Outlook
Quantitatively, US equities are significantly overvalued, while US corporate credit is slightly overvalued. Markets may sustain this trend for a few months until earnings, economic data, or Fed actions alter the "buy the headlines" dynamic. Our trading model identifies recent fund inflows as the key driver for this week's strategy.
Inflation, Economic Data, and Interest Rates
US May Nonfarm Payrolls: Increased by 139k, compared to April's revised +147k (down from +177k).
Average Hourly Earnings: Rose +0.4% MoM (vs. +0.2% in April), with YoY growth at +3.9%.
US Treasury 10-Year Yield: Roughly unchanged YoY at 4.49% YTM, down 8 basis points YTD.
Earnings Season Insights
While we will hear from Oracle (ORCL, Baa2/BBB) later this week, 1Q earnings season is ostensibly over. There are 42 trading sectors in our trading/research model. Over the next 6 weeks, we can provide summary data for most sectors.
Big 6 Banks Operating and Loan Metrics 1Q 2025
Loan growth at US' largest banks is just over .5 % QoQ and 3% YoY. Balance sheet shift into trading securities has led to higher net interest margin which permitted the banks to charge off roughly 25% more (note JPM charge offs were +75% YoY).
Tier 1 capital remains roughly flat YoY while returns to shareholders via dividends and share repurchases rose +35% YoY.
Big 6 Banks Balance Sheet Metrics 1Q 2025
Net Debt: Grew $165 billion QoQ and $360 billion YoY.
Debt Issuance and Deposits: Banks issued $100 billion in new debt, while deposits grew by $157 billion.
Liquidity: Declined due to a shift from cash and loans to trading securities.
Profitability: The strategy yielded stronger profitability despite minimal revenue growth YoY or QoQ.
Friday's US Investment-Grade and High Yield Credit Trading
Trading volume was 1% above average for a Friday. G-254 issuers accounted for 86 of the top 100 traded bonds, representing 92% of top 100 issuer volume and 73% of total TRACE volume.
· Market Movement:
o U.S. CDX Index was (-1.5bp) tighter @ 54bp.
o U.S. IG cash spreads ranged from -2 to -5 basis points tighter.
o Energy and BBB financials outperformed while consumer underperformed.
Dealers purchased over $1 billion in high-yield bonds for the fourth consecutive day, with CommScope (COMM not in our trading research universe) Charter Communications (CHRTR attractive long) and bought $27 million of EchoStar (SAT) and DISH (DISH) bonds after selling $110 mm of bonds Thursday post an S&P note indicating DISH has sufficient cash to cover missed coupon payments on deferred bonds. However, The Dish balance sheet does not actually maintain enough cash to make coupon payments, and could only be made via intercompany loan from EchoStar. Both issuers were considered attractive short trading indicators post earnings results.
Dealers did not net buy or sell IG bonds on Friday. JP Morgan (JPM A1/A attractive short trading indicators) and T - Mobil (TMUS, Baa2/BBB attractive short trading indicators) were the most bought by dealers. Comcast (CMCSA, A3/A- attractive short trading indicator) was the most bought by end users on Friday.
Attractive trading sectors
Long Opportunities
None – there are only 213 bonds considered undervalued ($308 billion) and 66 considered attractive long trading indicator ($91.2 billion) by our trading model
Short Opportunities
U.S. Big 6 Banks (All Ratings): $649 billion in overvalued market capital across 251 bonds, with 61 short indicators.
Energy (All Ratings) : $198.8 billion in overvalued market capital across 138 bonds, with 83 short indicators.
BBB TMT: $185.8 billion in overvalued market capital across 109 bonds, with 38 short indicators.
Single A Healthcare: $126.1 billion in overvalued market capital across 89 bonds, with 37 short indicators.
Issuer News
Novo Banco SA: Portugal's fourth-largest lender has received bids from French banking group BPCE (BPCEGP) and CaixaBank SA (CAIXB).
TotalEnergies SE (TOTFP): Plans to sell a 50% stake in a large portfolio of US renewable assets and a similar stake in a smaller group of solar farms in Spain.
Meta Platforms (META): In talks to invest over $10 billion in AI startup Scale AI, according to Bloomberg.
Rio Tinto (RIOLN): Seeks a multibillion-dollar government bailout for its Tomago aluminum smelter in Australia due to rising energy costs, per Bloomberg.
AT&T (T): A data leak affecting 88 million customers now includes dates of birth and Social Security numbers, as reported by Hackread.
EchoStar (SATS): Considering a Chapter 11 bankruptcy filing to protect its wireless spectrum licenses from potential revocation by federal regulators, according to the Wall Street Journal.
U.S. IG Credit Valuation and Spreads Monday
Bloomberg's index incorporates new bond supply in a non-systematic, non-mathematical manner, leading to inconsistent short-term spread readings. On Friday, dealer bids reversed, and spreads tightened by 5–8 basis points post-NFP data. With no new bond supply, Bloomberg's index aligned more closely with observed market trends. Approximately 50% of spread widening occurred between November 12, 2024, and April 10, 2025. Despite the trading model shifting to an "overvalued" stance, last week's fund inflows and below-average attractive short trading indicators (relative to the two-year average) keep the model's trading strategy unchanged from Friday.
Global Equity Correlation to IG Credit Spreads
US equities and investment-grade (IG) credit spreads moved in tandem for 28 of the last 32 days. Key quantitative factors explain credit's relative underperformance compared to equities in 2025:
Technology represents 31% of S&P 500 market capitalization but only 8% of global top issuer debt.
Non-US corporate bond purchases declined 44% year-over-year.
Year-to-date retail inflows total $12 billion, 47% below the same period in 2024, despite last week's significant inflow.
New Supply / Bond Maturities / Credit Fund inflows for June
No new supply on Friday. Thus far this month, 10 G-254 issuers have come to market selling 19 deals for $14.4 billion. 8 issuers have sold €9.3 billion of new supply in Europe this month.
U.S. high-grade bond funds recorded their largest weekly inflow of 2025, with investors injecting over $4 billion into investment-grade bond funds for the week ending June 4. High-yield funds attracted nearly $1.5 billion in inflows, while leveraged loan funds saw $44.7 million, down from the prior week. When combined with over $ 20 billion of G – 254 bond maturities and redemptions in the first 9 days of June, net cash from US investors is increasing, while non US investors are not adding to purchases, but are not withdrawing money from the US credit market either.
Systematic Trading Model Indicators and Trading Strategy - Friday
This morning's model output:
431 attractive short indicators, +102 from Friday AM with no only one sector (Big 6 banks) representing more than 13 additional attractive short trading indicators. of the indicator changes coming in single A rated credit.
68 attractive long indicators, -6 from Friday.
Of over 6,000 bonds in our research universe, 431 are trading near their 52-week tight or wide spread levels—14% below normal and 10% below the threshold for initiating short positions.
Systematic Trading Strategy for Monday June 9
Strategy: As noted Friday, the trading model reverts to its prior strategy until new fund flow data is released this Thursday. The model prioritizes long positions in deleveraging new issues with attractive valuations. Avoid adding short positions until attractive short trading indicators exceed 400 and weekly fund inflows fall below $1.5 billion. The model indicates shorting one bond for each bond added long.
Systematic Credit Indicators
Our 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 managing volatility risk.
Most Recent Model Trading Indicators
Macquarie (MQGAU, Aa3/A+) MQGAU Float 06/12/28 and
HSBC (HSBC, A3/A) HSBC 4.899 03/03/29 both reached its avoid trading level on Friday
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.
BHP (BHP, A1/A) BHP 5 1/8 02/21/32 is 1 of 10 new issue model indicators published prior to February 23, 2025 that has not reached its avoid trading level.
This Morning the trading model adds Apple (Aaa/AA+) AAPL 4 ½ 05/12/32 issued on May 5, 2025 +40/7Y and now trading +42/7Y as a new issue long indicators.
Sample Trade Performance Report (January 4, 2025 – June 6, 2025)
Overview
Total Trades: 113 (1% of total indicators)
Performance Summary:
Long Indicators: 63/85 reached avoid-trading levels, tightening by -10.44 bp.
Short Indicators: 24/28 reached avoid-trading levels, widening by +5.3 bp.
Remaining Longs: 22 tightened by -0.09 bp.
Remaining Shorts: 4 tightened by -5 bp.
Average Spread Movement: ±6.96 bp in the indicated direction.
Success Rate: 79% of indicators reached avoid-trading levels (11% below normal).
Notes:
All initial indicators are based on TRACE print (or new issue price) at the indicators date.
All avoid indicators are based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
14 long indicators hit avoid-trading levels, contributing -1.4 bp to the overall spread tightening for the 63 long trades.
Overall performance improved from ±4.91 bp to ±6.96 bp across 113 sample trades.
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.