Systematic Credit and Equity G-250 Trading Indicators for May 2, 2025
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Good Afternoon. US jobs data, another set of earnings reports and headlines still focusing on tariffs and guestimates for inflation, unemployment and corporate earnings. Equities are inching back towards the SPX 200 moving average (5745). Corporate credit? Not so much.
Why are equities outperforming US IG credit? A: Issuers are borrowing money to repurchase stock and pay dividends. Is this a new phenomenon? A: No, but the trend hasn't been this pronounced in 15 – 20 years.
As initially commented when the tariff talk began, the other "elephant in the room" is capital outflow.
However, the true ramifications of "tariff talk" are yet to be heard. The tariffs have to be implemented and the world economy will need to act. What we are getting are estimates "should the tariffs be implemented."
In the meantime, corporates are in a holding pattern. No real decisions have been made and won't be made until there is greater clarity as to the "cost of doing business."
As for today's jobs numbers? A: Well, not certain of a rate cut in June. And given Thursday's jobless claims +32k YoY in the week ended April 25, a negative NFP number for May is a possibility. However, we would need to see 3 more 240k+ jobless claims before any assumption can be made about May NFP.
Earnings Season
While earnings season is only 55% complete, we have enough information to draw conclusions, create trading strategy, sector and individual credit curve conclusions.
US corporations are borrowing more money and faster than non-US large corporate bond issuers. Big 6 banks are the largest borrowers followed by Single A healthcare and US utilities. UK banks aren't borrowing any additional funding. Single A rated Energy companies aren't adding new debt either.
Thursday's US IG Credit Trading:
We saw May Day in Europe cut into morning volume and overall trading wound up (-7%) lower than average. CDX was almost unchanged and cash bonds were unchanged to (-3bp) tighter. Citigroup sold front-end bonds and Mondelez small offerings in 3 tenors. US financials were better bid (and tighter). Energy bonds (no heavy volume) were for sale.
How to trade Earnings Season
With enough reported earnings data now to determine strategy:
Long Positions: Attractive bonds (or new supply) from issuers that have already reported results.
Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet.
Issuer News on Thursday
Bayer (BAYNGR) is exiting its seed treatment equipment business in the US, which is "necessary to help secure the financial future of the company." It added that resources will be redirected to primary areas of strength in crop protection products. Bayer reports results on 5/13.
Glencore Plc (GLENLN) expects marketing profits to fall this year due to increasing uncertainty over the global economy. The company's full-year marketing profits are expected to be around $2.2 billion to $3.2 billion. Glencore only reports results every six months and is due to report next in August.
Volkswagen Financial Services (VWFS), the captive financial services arm of Volkswagen Group of America, and Wells Fargo (NYSE: WFC) today began their multi-year co-branded agreement under which Wells Fargo serves as the preferred purchase financing provider for the Volkswagen (VW) and Audi brands in the U.S. market.
Inflation Readings and Government Bonds
We are finally in May. We should begin to see the impact of the current trade tariffs in place with the beginning of April pricing data starting with ISM data on Monday, May 5.
U.S. IG Credit Valuation
US investment-grade (IG) credit continues to be the "most attractive" for long credit Indicators for the 32nd consecutive trading day. See details in the Model output section below.
Global Equity Correlation to IG Credit Spreads
It is not unusual for US credit spreads and US equity prices to diverge for 2 – 3 days after equity earnings are reported. This is what we saw in Auto, Consumer, Energy and TMT names this week. However, as time elapsed, Auto spreads began to track auto equity price movement as did healthcare. We will see next week how TMT, Energy, Utility credit spreads move once equity earnings have been digested.
New Supply / Bond Maturities / Credit Fund outflows for April and May
Two new global 250 issuers selling USD bonds on Thursday: Citigroup (C) sold $4.35 billion of 3nc2 and 6nc5 fixed and floating rate notes (4 tranches); only the 6nc5 fixed deal was deemed attractive by our trading model. New BNP (BNP) performed well on Thursday (as expected) while recent Alphabet and Walmart deals stagnated on Thursday.
Investment grade bond funds saw their 6th consecutive weekly outflow (-$1.51 billion). The 6-week outflow now totals (-$15 billion). Over the same time period, US leveraged loan funds have seen (-$9.5 billion) of outflow according to Lipper LSEG.
Systematic Trading Model Indicators – Thursday
We saw US IG spreads tighten only slightly on Thursday. Our trading model output only changed based on reported earnings.
Thus far, 64 of the world's 122 largest corporate debt issuers reporting results are adding net debt.
The model maintains its "long-only" stance across its 6,200-bond, 250-issuer USD large-cap universe for the 32nd consecutive trading day. Attractive short Indicators remain near five-year lows, with over 85% of model Indicators classified as attractive long.
Attractive Trading Sectors
Attractive Long Trading Sectors: US Single A rated technology, UK banks, BBB Healthcare, US Regional, European, and Canadian Banks are the most attractive long trading sectors this morning within the 6,200 USD bond universe analyzed daily by our model.
Attractive Short Trading Sectors: None. The consumer sector is releveraging. Consumer credit spreads are (+15bp) wide of attractive short trading levels. Single A Industrials (-18bp) tighter, all but 3 Single A rated industrial issuers (Boeing (BA), Airbus (AIRFP) and GE Aerospace Bateman (GE)) are adding net debt to their respective balance sheets. US Big 6 banks are also attractive short trading Indicators (-12bp) tighter from current trading levels.
Systematic Credit Indicators
Our systematic strategies employ defined trading processes and portfolio construction parameters. This clarity differentiates them from discretionary approaches, offering replicable and auditable methods. We rely only on stochastic trading algorithms to identify opportunities, backtested on historical data to validate strategy performance. We target ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.
Most Recent Model Trading Indicators
This morning the trading model adds yesterday's Citigroup holdco (Baa1/A-) new 6nc5 with (-7bp) of projected spread tightening.
Thursday Sample Trading Indicators with Credit Spread Movement
Since February 24, we've published 31 secondary and new-issue trading indicators from our model:
• 12 indicators have reached their avoid-trading level.
• The remaining 19 indicators have widened by an average of +6.2
bp.
• Across all 31 indicators, credit spreads are unchanged.
Prior long/short trading Indicators
Of the 46 new-issue and secondary trading indicators published (22 long and 24 short) that reached their avoid trading level, the average credit spread movement was (+/-5.6bp).
Of the 10 long indicators issued before February 22 that haven't yet hit the avoid-trading threshold:
• Four are BBB-rated and have widened by 32 bp on average since being indicated.
• They currently trade at 157 bp over the UST curve, with an 8.2-year duration.
• Our model projects an average spread tightening of -37.3 bp remaining.
• Six are single-A rated and have widened by +22.8 bp since being indicated.
• They now trade at 115.2 bp over the UST curve, with a 10.7-year duration.
• The trading model indicates an average spread tightening of -27 bp remains.
Earnings results this morning
Becton Dickinson (BDX, Baa2/BBB)
Model Trading Indicates: Our trading model does not see any BDX secondary trading bonds that are yet overvalued. Hence the model would see Becton Dickinson as an attractive short trading Indicators at (-13 to -18bp) tighter credit spreads.
Exxon Mobil (XOM, Aa2/AA-)
• Exxon reported higher than expected earnings but saw production (which is up 20% on the Pioneer acquisition) fail to meet analyst's expectations. We're not in the estimating business; our trading model relies only on publicly available information. Our publicly available information tells us XOM produced over 4.5% of the world's global output in bbl/day metrics. So, creating trading paradigms on production estimates can be hazardous to your P&L.
• Financial Position: Cash flow from operations is just about covering investment cash outflow. The Exxon Mobil (XOM) balance sheet is relevering but not by much.
• Model Trading Indicates : Our trading model does not see any Exxon Mobil (XOM) secondary bond that is either attractive long or short at current trading levels.
Chevron (CVX, Aa2/AA-)
• Similar to Exxon, Chevron reported 1Q net earnings that exceeded expectations and produces 75% as much oil as Exxon. CVX is cutting their share repurchase budget in 2Q 2025 by (-25% to -40%) as the price of oil continues to fall.
• Financial Position: Depending on perspective, CVX has more cash + total investments than debt. On a pure cash + short-term investments basis, CVX has $20 billion of net debt as of 12/31/24.
• Model Trading Indicates: Our trading model does not see any opportunity in the CVX secondary trading curve at this point. CVX will report more balance sheet and cash flow information when they file their 10-Q within the next couple of weeks.
Cigna (CI, Baa1/BBB+)
• Reported 14.5% 1Q revenue growth and 17% operating earnings growth. Cigna raised operating and reported net earnings guidance on better pricing and new pharmacy programs.
• Financial Position: Cigna could, if they wanted, be a single A rated health insurer. For now, we will need to settle with a delevering balance sheet. CI will file the 10-Q shortly which will show operating and investing cash flows.
• Model Trading Indicates: Our credit trading model sees 7 of the 16 liquid USD Cigna secondary bonds as undervalued from a long trading perspective. The model sees the CI 4.8 08/15/38 as the most attractive long trading Indicator.
Dominion Energy (D, Baa2/BBB)
• Dominion Energy reported 1Q revenue and earnings which grew and exceeded analyst expectations. Management maintained 2025 guidance and made comments as to demand strength. Company believes that US trade tariffs would cost roughly $500mm and the company will generate roughly $16 billion of revenue in 2025.
• Financial Position: Thus far, Dominion is the only Utility issuer in our 20 company Utility large cap trading group that is delevering its balance sheet.
• Model Trading Indicates: Dominion only has 5 issuers with market capital of $1 billion or greater. However, our trading model sees the D 3 3/8 04/01/30 holdco and the D 7 Jr Subordinated bonds as the most attractive long Indicators in the Dominion secondary trading structure at current prices.
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.