Systematic Credit and Equity G-250 Trading Indicators for June 12, 2025
Oracle Earnings, US Inflation Data, BBB TMT Summary Data, and Model Output
Good morning. Apologies for a few errors in Wednesday's update. Oracle (ORCL), not Cisco (CSCO), reported results last night. Additionally, 50% of the credit spread widening from November 12, 2024, to April 10, 2025, has been retraced. May CPI and June 9 weekly ETF fund flows only slightly pressured U.S. equity prices and correlated U.S. credit spreads on Wednesday. U.S. equity trading volumes are slightly above average but declining, with lower volatility compared to 2022–2023, and significantly lower than during the 2015–2016 (Earthquakes and Brexit) and 2020–2021 (COVID) periods. U.S. equities are near all-time highs, with valuations at 28.7x earnings, close to historical peaks. U.S. credit trading volumes are running 15% below normal, and credit spreads are far from their 10-year tights of November 2024. Historical credit spread "blowouts" in 2015–2016, 2018, 2020, and 2022 all exceeded 100 basis points, a magnitude not currently observed.
The statistical correlation between U.S. equity and debt prices remains intact, though the magnitude of movements has diverged in this cycle due to 50–100% larger capital returns to shareholders via dividend increases and share repurchases (see earnings season insights). We have statistically demonstrated that the majority of increased capital returns by the world's largest 255 corporate borrowers have been financed through global corporate debt markets. Combined with the $7 trillion cash bubble from 2020 PPP loan forgiveness and three U.S. government stimulus packages, the U.S. corporate bond market has added over $2 trillion, supporting global equity price buoyancy.
As noted yesterday, equity markets often "buy the rumor, sell the facts." Given the domestic popularity of the current U.S. President and sustained U.S. and non-U.S. funding, the "Trump Tariff Trade" has proven highly profitable in both equity and credit markets. What could disrupt this trend? A significant dose of reality. Currently, neither market is reacting to such.
Equity and Credit Market Dynamics
U.S. equities are trading at seven-year "non-crisis highs," yet Wall Street analysts' forecasted earnings growth is at 15-year lows.
An example of tariff headline impact on equity prices and credit spreads is General Motors' (GM) announcement of a $4 billion, two-year investment to increase U.S. assembly capacity to 2 million vehicles annually.
How much additional assembly capacity will this $4 billion investment create? 300,000 units.
How much has GM invested annually in U.S. manufacturing and assembly plants over the past 10 years? $3.5 billion.
How many vehicles did GM assemble in the U.S. in 2024? 2 million.
How many vehicles does GM sell in the U.S. annually? 2.7 million.
How many vehicles does GM sell worldwide annually? 6 million.
How many factory jobs will the new U.S. capacity create? Between 2,500 and 6,000, depending on the extent of capacity deployment.
Quantitatively, GM's announcement suggests limited impact from trade tariffs. However, GM's equity trades within 20% of its all-time high despite a challenging 12-month outlook. GM's credit spreads, which reached five-year tights last fall, are not at levels our trading model considers attractive for short indicators.
Our trading model indicates that U.S. credit, while overvalued, is not significantly so. Most issuer bonds have room for 20+ basis points of spread tightening before our model would signal overvaluation comparable to November 2024. The model uses valuation extremes to generate profitable trading indicators during market overreactions and employs a long/short portfolio allocation process for the bonds of the 255 largest global issuers when markets are not at extremes (see model trade indicators on page 5)
Systematic Credit Model Portfolio Trading Strategy – Thursday, June 12
Of the 6,000+ bonds in our research universe, 519 are trading near their 52-week tight or wide spread levels, 7.5% below average. The trading model indicates:
65% long/short positioning strategy.
35% allocated to front-end Indicators, with 70% in floating-rate notes (FRNs) maturing in three years or less, targeting undervalued, deleveraging bonds.
Key Trading Issues for Wednesday
Lloyds Banking Group (LLOYDS multiple ratings and attractive long trading rec): 11nc10YTV Subordinated Note reached its avoid point (-7 bp from new issue in one trading day).
Warner Bros. Discovery (WBD, Ba2+/BB-, attractive long recommendation): One of the most actively traded issuers in both IG and HY markets on Wednesday following Fitch's downgrade.
Whirlpool (WHR, BB+/Baa3): Led a sixth day in seven where U.S. broker-dealers bought over $1 billion of USD-denominated non-investment-grade debt.
Inflation, Economic Data, and Interest Rates
May CPI Data: Core CPI increased 0.1% month-over-month (MoM) and 2.7% year-over-year (YoY), with goods prices flat and services prices up 0.2%.
May PPI Data: To be announced later this morning.
Earnings Season Insights
Oracle (ORCL, Baa2/BBB+ attractive short)
Q4 Results: Revenue: $15.3 billion, +11% YoY. Operating Income: $5.1 billion, +10% YoY.Net Income: +10% YoY.
Guidance: Raised FY 2026 revenue guidance to +14% YoY but lowered Q1 FY2026 guidance to +11%–13%. Oracle doubled AI revenue projections, increasing capex estimates for 2026.
Financial Position: Cash Flow: Free cash flow rose 12% YoY, but capex is projected at $20 billion+ in 2026, meaning $6–$7 billion in dividends and share repurchases will be debt-financed. Debt: Net debt increased by $3 billion in Q4 and $5.2 billion YoY.
Model Trading Indicators: Of 42 liquid USD ORCL bonds, 32 are undervalued ($18 billion), and 10 are considered attractive short indicators ($6 billion). Most Attractive Short: ORCL 4.50% 02/06/2033. The trading model does not seen ORCL equity as attractive at last night's closing level.
With TMT earnings season paused, we summarize key data for BBB TMT issuers in Q1 2025, which feeds into our systematic trading model.
BBB TMT Q1 2025 Operating Results and Balance Sheet Metrics
Issuers: 24 reporting BBB TMT issuers (11 deleveraging, 13 releveraging). Excludes issuers reporting only June 30 and December 31 results. Includes 6 HY issuers (HY breakout to follow after Q2).
Net Income: Rose $8.4 billion to $24.4 billion (+52% YoY), driven by reduced goodwill charges and asset write-downs.
Revenue: +1.2% YoY.
Operating Margin: Declined 88 bps YoY.
Dividends and Share Repurchases: +17% YoY, aligned with cash flow growth.
Net Cash: +$8.7 billion quarter-over-quarter (QoQ), but -$18 billion YoY.
Debt Issuance: +$8.5 billion QoQ; $16.6 billion of BBB TMT debt retired YoY.
Liquidity: +$2.5 billion QoQ, +$21.5 billion YoY.
Trend: BBB TMT issuers in our universe are deleveraging.
The world's 175 largest non-financial issuers added $96 billion in net debt while increasing dividends and share repurchases by $46 billion.
Wednesday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading Volume: 20.4% below average. G-255 Issuers: Accounted for 94 of the top 100 traded bonds, representing 94% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading Volume: 8.9% above average. G-255 Issuers: Accounted for 19 of the top 25 traded bonds, representing 77% of top 25 issuer volume and 65% of total TRACE volume.
Market Movement
U.S. CDX Index: Unchanged at 53.5 bp.
U.S. IG Cash Spreads: +2 bp wider to -1 bp tighter. Outperformers: Autos and TMT. Underperformers: Financials.
CDX HY Index: Unchanged at 106.8 bp (per Bloomberg).
HY Cash Bonds: Tightened -4 bp, led by HY and non-IG financials.
High-Yield Activity - U.S. dealers purchased over $1 billion of HY bonds for the 5th day in 6.
Most Sold End-User Bonds:
Warner Bros. Discovery (WBD, Ba2/BB-, attractive long, downgraded to HY).
Whirlpool (WHR, Ba1/BB+, not in our trading/research universe).
Investment-Grade Activity -Dealers neither lifted nor bought bonds on Wednesday.
Most Sold End-User Bonds:
Warner Bros. Discovery (WBD, Ba2/BB-, attractive long, downgraded to HY).
Morgan Stanley (MS, A1/A- attractive short).
Most Bought Issuer Bonds:
UnitedHealth Group (UNH, A3/A-, attractive short).
Goldman Sachs (GS, A2/BBB+, attractive short).
Attractive Trading Sectors
Long Opportunities
Only 185 bonds ($261 billion) are undervalued, with 59 ($76 billion) considered attractive long indicators by the trading model.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $66.5 billion in overvalued market capital across 258 bonds, with 74 short indicators.
Energy (All Ratings): $19.9 billion in overvalued market capital across 138 bonds, with 82 short indicators.
TMT (All Ratings): $31.7 billion in overvalued market capital across 187 bonds, with 87 short indicators.
Single A Healthcare: $12.7 billion in overvalued market capital across 89 bonds, with 29 short indicators.
Issuer News
BPCE (BPCEGP, Baa1/BBB+ attractive long): Actively pursuing the acquisition of Novo Banco. Lone Star is considering a potential listing of Novo Banco but has not finalized its decision.
U.S. IG Credit Valuation and Spreads
U.S. credit spreads have recovered 50% of the expected widening from November 12, 2024, to April 10, 2025.
Credit spreads typically follow equity movements, driven by CDS and CDX spreads tied to equity put premiums.
Despite the trading model's "overvalued" stance, the net short portfolio indicators is not at November 2024 levels.
Global Equity Correlation to IG Credit Spreads
U.S. equities and IG credit spreads both retreated on Wednesday, moving in tandem for 31 of the last 35 trading days.
Key quantitative factors explaining credit's relative underperformance compared to equities in 2025 are detailed on pages 1 and 2 of today's report.
New Supply, Bond Maturities, and Credit Fund Inflows for June
Tuesday's New Issues: Three Lloyds Banking Group (LLOYDS) and two Australia and New Zealand Banking Group (ANZ) transactions were viewed as attractive by the U.S. credit market.
The Lloyds subordinated deal outperformed.
Wednesday: No new G-255 supply in the U.S. or Europe.
Fund Flows:
Net inflows to ETFs totaled $5.9 billion for the week ended June 10, 2025 (including leveraged funds), up from $4.4 billion the prior week.
Broad bond-market ETFs fell by $804.2 million to $3.27 billion.
Government bond ETFs increased by $2.33 billion to $520.1 million.
Corporate bond inflows were $551 million, down from $1.605 billion for the week ended June
Systematic Trading Model Indicators and Strategy
Model Output
460 attractive short indicators: Up 1 from Wednesday, 4% above average, signaling overvaluation with potential for short indicators to double as U.S. credit spreads tighten.
59 attractive long indicators: Up 6 from Wednesday.
Weekly Trading Strategy (Ending June 12)
Model output unchanged until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Avoid adding short positions until attractive short indicators exceed 400 and weekly fund inflows fall below $1.5 billion.
Model Portfolio Trading Indicators: Short one bond for each bond added long.
Systematic Credit Indicators
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 managing volatility risk.
Most Recent Model Trading Indicators
Apple (AAPL, Aaa/AA+): AAPL 4.75% 05/12/2035 reached its avoid trading level on Wednesday (-8 bp from new issue price), the first of three new AAPL bonds to hit this target.
Union Pacific (UNP, A3/A-): UNP 5.60% 12/01/2054 is one of 10 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
BHP Group (BHP, A1/A): BHP 5.125% 02/21/2032 reached its avoid trading level on Wednesday (-6 bp from new issue).
Lloyds Banking Group (LLOYDS, Baa1/BBB-): Subordinated LLOYDS 6.068% 06/13/2036, added as a sample attractive long indicators on June 10, reached its avoid trading level on Wednesday (-7 bp).
Sample Trade Performance Report (January 4, 2025 – June 11, 2025)
Total Trades: 117 (1% of total indicators).
Performance Summary:
Long Indicators: 67/89 reached avoid-trading levels, tightening by -10.09 bp.
Short Indicators: 24/28 reached avoid-trading levels, widening by +5.3 bp.
Remaining Longs: 22 tightened by -0.5 bp.
Remaining Shorts: 4 tightened by -5.5 bp.
Average Spread Movement: ±6.95 bp in the indicators direction.
Success Rate: 79% of indicators reached avoid-trading levels (11% below normal).
Notes:
Initial indicators based on TRACE print (or new issue price) at indicators date.
Avoid indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)