Systematic Credit and Equity G-255 Trading Indicators for September 10, 2025
Good Morning USD credit and US equities failed to directionally correlate for the 8th trading day in 14. USD credit investment grade credit and High Yield were wider Tuesday. US equities were higher. We get PPI prior to CPI inflation data this month. At the commences this morning.
US Supreme Court to hear tariffs appeal in November
The US Supreme Court will rule on the legality of the majority of President Donald Trump's tariffs, with oral arguments scheduled for the first week of November. As highlighted in our reports over the past two weeks, this issue will begin impacting reported corporate earnings starting October 8.
Earnings and economic impact of tariffs appeal
Given the uncertain outcome, both reported earnings and outlooks will need to be "adjusted" as will manufacturing, sourcing, assembly, transport/delivery, and product pricing. Establishing a clear operating strategy and subsequent capital decisions related to the tariffs could take an additional 6–9 months. This uncertainty is likely to delay hiring and development plans for most major corporations until the tariffs are codified into law.
Capital Flows related to changes in US trade policy
Turning to capital flow, as previously noted, 35% of US capital stock (including USTs, equities, and corporate debt) is held by non-US persons or entities, with capital being our largest import. Although we have observed initial capital flows to other markets, significant capital outflows from the US have not yet occurred. The Supreme Court hearing and its eventual ruling are expected to postpone any substantial outflows for several months.
In the interim, M&A activity in the US continues to increase. Most corporations are focused on generating cash and returning more than they generate to shareholders. In the US, persistent corporate share repurchasing, dividend increases, and $7 trillion in money market cash continue to support the resilience of the US risk market, regardless of tariff-related challenges.
From a constitutional perspective, the Supreme Court's tariff case is likely to have a more profound effect on corporate earnings estimates and capital market activity over the coming years than any other single macroeconomic event.
Oracle 1Q earnings and outlook
Oracle announced solid 1Q earnings on Tuesday evening (see page 7), but its forward-looking guidance stole the spotlight. With all but two BBB-rated TMT issuers having reported interim results, we now have a clearer picture of the BBB TMT sector's financial performance, one of the top four attractive long corporate bond trading sectors.
G-255 BBB TMT Issuer Operating Metrics 2Q 2025
The TMT sector holds a larger percentage of the USD corporate bond index than any other corporate bond index in non-USD currencies.
Revenue growth across the sector is slowing, and operating margins are contracting due to the scale of the largest cellular, internet, cable, and media providers. However, mature technology companies such as Broadcom (AVGO Baa1/BBB+ attractive long both debt and equity), Dell (DELL Baa2/BBB attractive short debt, attractive long equity), and Oracle (ORCL Baa2/BBB attractive short debt, attractive long equity) continue to achieve double-digit revenue growth, with earnings increasing 14–55% year-over-year, driven by their ability to capitalize on demand for Artificial Intelligence (AI) solutions.
G-255 BBB TMT Issuer Balance Sheet Metrics 2Q 2025 (15 de-levering/12 re-levering)
While shareholder returns from BBB TMT issuers are growing five times faster than revenues, the sector's overall balance sheet is deleveraging both quarter-over-quarter and year-over-year. Fifteen of the 27 issuers in this sector are reducing debt.
The extent of increased or decreased financial leverage varies by issuer. However, from a total return perspective (debt and equity), the BBB TMT sector has delivered the second-highest risk/return profile in 2025.
Trading Model Indicators and Strategy For Wednesday
Our systematic trading model indicates that USD high-yield (HY) and investment-grade (IG) credit are modestly overvalued. Continued inflows into IG credit, combined with 45 sector indicators, suggest higher valuations (tighter IG spreads and elevated HY prices). Unusually, the model identifies 10-year credit as attractive over the next two trading days.
Nine weeks ago, the systematic trading model flagged Single A Industrials, BBB Industrials, and BBB Energy as attractive short trading sectors. Over the past four weeks, indicators for both Single A and BBB Industrials have shifted to overvalued. Post-earnings, BBB Energy has now become an attractive long opportunity.
Today's Systematic Trading Sector Indicators
Top 3 Short-Indicated Sectors:
• Big 6 Senior Bank Holdco (USD only)
• USD Single A Healthcare sector (USD only)
• European Single A and BB Energy (all currencies)
Top 3 Long-Indicated Sectors:
• UK Banks (all currencies)
• US BBB TMT (USD and EUR)
• French Banks (all currencies)
USD Systematic Trading Model:
This morning's model indicators continue to indicate US credit will tighten or rise in the near term. This despite credit spread widening in 5 of the past 7 trading days and almost $70 billion of new G – 255 supply in just 1 week.
Trading Allocation Strategy
50% Long: Undervalued, deleveraging bonds.
30% Short: Overvalued bonds in re-levering sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 155 long/short trades in 2025 (marked via TRACE), 90% achieved ±5 bp targets, averaging ±7.15 bp per trade. Between June 30 and September 6, 2025, 29 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Last week saw inflows into US corporate bond ETFs and mutual funds for investment-grade bonds.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, as global regulatory requirements for reported material events could impact trading without notice.
US Economic Indicators / Inflation and Interest rate outlook
Inflation expectations at the one-year horizon were higher at 3.2% in August from July's 3.09%, according to the New York Fed's survey of consumer expectations.
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -3% below average
-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 78% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +16% above average
-G-255 Issuers: 10 of the top 25 traded bonds accounted for 61% of top 25 issuer volume and 64% of total TRACE volume.
Tuesday Credit Market Movement
U.S. CDX Index: -.2 @ 49.7bp
U.S. IG Cash Spreads: (+1 to +3bp) wider with Banks underperforming.
CDX HY Index: unchanged @ 107.3 (per Bloomberg).
HY Cash Bonds: Were higher Tuesday with HY Utilities outperforming.
High-Yield Activity
- Dealers bought $600 mm of HY bonds Tuesday.
Most Bought HY Bonds
- EchoStar (SATS Caa1/B attractive long)
Most Sold HY Bonds
- NCL Holdings (NCL B3/B+)
Investment-Grade Activity
- Dealers sold $1.2 billion of IG bonds Tuesday.
Most Bought Sector: BBB TMT
- Verizon (VZ Baa1/BBB+ attractive long)
- T- Mobil (TMUS, Baa2/BBB attractive long)
Most Sold Sector: US Regional banks
- American Express (AXP A2/A- attractive short)
- PNC Corp (PNC , A3/A- attractive long)
Attractive Trading Sectors
Long Opportunities
Focus on de-leveraging issuers, including Single A-rated global Autos, BBB-rated TMT, BBB-rated Energy, Euro Yankee Banks and Floating Rate Notes.
Valuation: The stochastic credit trading model identifies 195 undervalued bonds ($294 billion), with 75
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,495 bonds ($2.34 trillion) are overvalued per the stochastic credit trading model, with 768 short trade indicators.
U.S. Big 6 Banks (All Ratings): 294 bonds ($741.8 billion) overvalued, with 123 short indicators. We saw material weakness in this sector on Monday and not much follow through on Tuesday.
Single A and BB Energy: 106 bonds ($165 billion) overvalued, with 69 short indicators.
Single A Healthcare: 116 bonds ($168.7 billion) overvalued, with 71 short indicators.
Issuer News
ABN AMRO (ABNANV Baa1/BBB+)
The Dutch government is reducing its stake in ABN Amro Bank NV to about 20% from the current 30.5%, according to NLFI. The stake being sold is worth about €1.55 billion at current market prices, and the disposal is part of a broader move by governments across Europe to unwind their bailout-era investments in banking.
ABN Debt and Equity indicators are both attractive long.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 23% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation
The systematic credit trading indicator (Investment Grade and High Yield) is back to modestly overvalued. A record 140 of the world's 255 largest corporate debt issuers, the highest in the 34-year history of the trading model, are increasing leverage on their balance sheets.
2025 10-Year Credit Spreads
Year-over-Year (YoY): 10-year credit spreads are wider compared to last year.
Year-to-Date (YTD): Spreads are also wider YTD.
UST 10-Year Rates: Up 43 basis points (bp) YoY but down 49 bp YTD.
Spread Widening: The Bloomberg/Moody's 10Y index shows wider spreads due to new bond supply at elevated levels over the past 6 trading days, combined with a 18 bp decline in UST 10-year yields over the last 6 trading days.
Global Equity Correlation to IG Credit Spreads
USD credit and US equities failed to directionally correlate for the 8th trading day in 14. USD credit investment grade credit and High Yield were wider Tuesday. US equities were higher. USD 10Y credit and equity prices have correlated 136 out of 182 trading days in 2025. This is well below normal over the past 33 years. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.
New USD G-255 supply and fund flow data
Five additional G–255 issuers sold 9 bonds totaling $6.85 billion. The Huntington Bankshares 6.25% 5Y Non-Callable Perpetual (Baa3/BB+) and the MetLife (Met Tower) asset-backed 5-year transactions exhibited the strongest long trade indicators.
The model identifies the Huntington Bankshares (HBAN) 6.25% Perpetual (Baa3/BB+) with -20 basis points (bp) of upside and low volatility, as existing $25 preferreds trade well below 6%. The MetLife MET 4.2% 09/16/30 (Aa2/AA+) asset-backed bond offers +10 bp compared to the 2029 Met Tower existing bond.
Additionally, two Yankee issues priced significantly inside the attractive long indicator levels suggested by our trading model.
As this was the first Repsol Capital bond issued in the US, the model backed up attractive levels by +15 bp based on the premise that secondary trading levels will dissipate owing to small representation in the USD index at month end.
Stellantis new supply requires a steeper premium owing to:
(a) $5.5 Bil (7) bonds outstanding prior to the deal.
(b) Operating losses in both of the past two six month reporting periods.
(c ) Net debt rising by over $8 billion in the past 12 months.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 763, -60 from Tuesday as credit widened.
Attractive long indicators: 75, -21 from Tuesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-year maturities.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.
Replace Longs: Replace long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 70% long position hurdle is reached.
Current Status of trading indicators below:
During the last week 2 long trades reached their avoid trading level and was replaced by 4 new issue trade indicators.
Systematic Credit Trading Strategy September 10, 2025
Closed Positions: last week, the long/short basket trade exited 1 new issue and 1 secondary new trade.
Enter New Longs: On Monday the model added the new Merck (Aa3/A+) MRK 5.7 09/15/55. Tuesday trading indicators added the Elevance Health (Baa2/A-) ELV 5 01/15/36 and Capital One (Baa1/A-) COF COF 5.197 9/11/36
3. Enter New Short trades: The trading model indicators show adding short trades for each new long added after the Elevance Health (ELV) position.
4. Monitor Trade Position (Portfolio) Composition:
• Track the percentage of long positions relative to the total portfolio.
• If replacing the long positions that have reached their avoid trading level pushes the portfolio above the 70% long hurdle, initiate short positions in re-levering issuers (avoiding 7-year maturities) at a 1:1 ratio for any additional long positions.
5. Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic
6. Monday's Basket Trade long/ short ratio 68.75%
Systematic Credit Long/Short Basket Trade
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 minimizing volatility risk. The model employs only publicly available data.
Current Sample Systematic Basket bond trades based on trading strategy
Tuesday Trading Indicators: The new Capital One (Baa1/A-) COF 5.197 9/11/36 and Elevance Health (Baa2/A-) Elevance Health (ELV) 5 1/15/36 were long trade indicators added by the trading model.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 9, 2025)
Total Trades: 157 (1% of total trades).
Performance Summary:
Long Indicators: 112/125 reached avoid-trading levels, tightening by -9.47 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 13 widened by +1.19 bp.
Remaining Shorts: 5 tightened by -16.69 bp.
Average Spread Movement: ±7.07 bp in the indicated direction.
Success Rate: 90% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.35 trading days) normal.
Oracle Results from Tuesday
Oracle (ORCL, Baa2/BBB, attractive short debt attractive long equity) Earnings Summary: Oracle reported 1Q revenue that rose 12.7% YoY and operating income that rose 7% to $4.3 billion.
• Q1 Cloud Revenue $7.2 billion, up 28%
• Q1 Cloud Infrastructure Revenue $3.3 billion, up 55%
• Q1 Cloud Application Revenue $3.8 billion, up 11%
• Q2 – Q4 guidance: remaining performance obligations, or contracted revenue that has yet to be recognized. With the agreements, Oracle's RPO is up 359% from f2025.
Financial Position:
• 1Q cash from operations rose 11% YoY to $8.1 billion.
• 1Q Total free cash flow was negative after capex, share repurchase and dividends.
• 1Q Net debt rose +$6.7 billion YoY.
Trading Model Indicator: 45 USD Broadcom secondary bonds in circulation have a market capitalization of $750 million or more. 31 systematic trading model indicators are overvalued, and 6 bonds are have attractive short indicators. The ORCL 4.3 07/08/34 spread widening potential.
Equity Indicator: HPE US is attractive at $202.9 per share.
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.