Systematic Credit and Equity G-255 Trading Indicators for September 3, 2025
Good Morning
Tuesday's trading was marked by intraday volatility, with US equity prices declining by 0.7% after dropping as much as -1.5% intraday, coinciding with the close of European markets. US credit markets saw $43 billion in new investment-grade supply, predominantly from European and Japanese Yankee issuers. This surge aimed to capitalize on a temporary lull in tariff-related headlines, driven by ongoing US court rulings on the constitutionality of tariffs and the five trading days leading up to a French government no-confidence vote scheduled for next Monday.
Geopolitical and Capital Flow Dynamics
Speculation regarding the US President's health, combined with Executive Branch tactics and public communications, has prompted non-US entities to redirect capital. Several transactions among non-US domiciled entities appear designed to increase US market exposure while avoiding direct engagement with the US administration (see page 4 for details).
With $7 trillion in money market cash still on the sidelines, inflows into US equities from domestic entities remain the most likely outcome. However, US corporate debt is now facing headline risk due to over $1 trillion in net borrowings over the past 12 months, primarily used for share repurchasing and dividend payments. The rise in US corporate leverage, which has been tracked for several quarters, is now gaining broader attention.
Central Bank and Borrowing Costs
Central bank overnight interest rate cuts have not translated into lower public borrowing costs.
Of the seven major Western Hemisphere bank rate cuts over the past year, only Switzerland (with an overnight lending rate cut to 0%) and Italy have seen reductions in their 5-year government borrowing costs.
On average, 10-year government bond rates are up by more than 30 basis points year-over-year (see chart on page 2).
The record-high price of gold shows no correlation with US overnight lending rates.
Trading Model Insights
The trading model has shown a significant reduction in short trading indicators over the past five trading days, as Financial and Industrial Bonds (both US and Yankee) experienced material credit spread widening. Two weeks ago, the model identified these sectors as the most overvalued. However, it did not flag overvaluation for BBB-rated bonds in industrials, autos, and healthcare, resulting in a market overvalued indicator rather than an overall short credit trading signal. This was due to substantial cash inflows into US retail credit funds and $40 billion in G-255 bond retirements in August. Despite expectations of spread tightening, spreads widened by 10 basis points.
The model continues to indicate slight overvaluation, with attractive longs 18% below the 200-day moving average and attractive shorts 25% above it. Recent spread widening in subordinated US bank bonds and Single A-rated industrial bonds prompted two additional changes in the model's sector trading indicators overnight.
On Tuesday, the market saw $32.75 billion in new supply from issuers rated G to 255 across 37 transactions, including 16 bonds with a market capitalization of $1 billion or more. Notably, two-thirds of the bonds sold were issued by Yankee (non-US) issuers, with standout transactions from Merck (MRK, Aa3/A+, attractive long) and Cigna (CI, Baa1/A-), which together issued $9.75 billion in debt across nine transactions. The trading model rated 34 of the 37 deals as attractive for long positions.
Today's Systematic Trading Indicators
Big 6 Senior bank Holdco (USD only)
USD Single A Healthcare sector (USD only)
European Single A Energy (all currencies)
Are the top 3 short indicated sectors.
UK Banks (all currencies)
US BBB TMT (USD and EUR)
French Banks (all currencies)
Are the top 3 long indicated sectors.
USD Systematic Trading Model:
This morning's model indicators continue to indicate US credit will tighten or rise in the near term. This despite (+5 to +10bp) of credit spread widening in the past trading 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 150 long/short trades in 2025 (marked via TRACE), 92% achieved ±5 bp targets, averaging ±7.17 bp per trade. Between June 30 and August 25, 2025, 27 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Last week saw strong 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, complying with global regulatory requirements for material events.
US Economic Indicators / Inflation and Interest rate outlook
The US ISM index for August rose to 48.7 from 48 in July with new orders rising to 51.4 in August vs. 47.1 in July
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +2% above average
-G-255 Issuers: 99 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 70% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -7% below average
-G-255 Issuers: 16 of the top 25 traded bonds accounted for 60% of top 25 issuer volume and 69% of total TRACE volume.
Market Movement
U.S. CDX Index: +.3 @ 51.2bp
U.S. IG Cash Spreads: Wider for a sixth day (+1 to +6bp) with consumer underperforming
CDX HY Index: unchanged @ 107.2 (per Bloomberg).
HY Cash Bonds: Were lower Tuesday with HY Industrials and Healthcare underperforming.
High-Yield Activity
- Dealers sold $900mm of HY bonds Tuesday.
Most Bought HY Bonds
- CCO Holdings (CHTR B1/BB- attractive long)
Most Sold HY Bonds
- Sabre Global Inc (SABHLD B3/B- attractive short)
Investment-Grade Activity
- Dealers sold $1.8 billion of IG bonds Tuesday.
Most Bought Sector: Big 6 Banks
- JP Morgan (JPM A1/A attractive short)
- Bank of America (BAC A1/A attractive short)
Most Sold Sector: Healthcare
- Merck new issue (MRK Aa3/A1 attractive long)
- Cigna new issue (CI, Baa1/A- attractive long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, Single A rated global Autos, BBB TMT, BBB Energy, and Euro Yankee Banks. Overall model indicators 232 bonds ($347 billion) are considered undervalued by the stochastic credit trading model, with attractive 95 long trade indicators for the entire 6,000 USD bond universe.
Short Opportunities
1447 bonds ($1.08 trillion) are considered overvalued by the stochastic credit trading model with 596
short trade indicators (-399 WoW and -352 MoM).
U.S. Big 6 Banks (All Ratings): $740 billion in overvalued market capital across 296 bonds, with 78 short indicators (94 fewer WoW).
Single A Industrials no longer carry a short trade indicator: the number of individual bond short trading indicators has dropped from 90 to 40 in 8 trading days.
Single A and BB Energy $184.6 billion in overvalued market capital across 107 bonds, with 69 short indicators.
Single A Healthcare $164 billion in overvalued market capital across 113 bonds, with 61 short indicators.
Issuer News
Kraft Heinz Co (KHC Baa2/BBB) Restructuring
Kraft Heinz Co. plans to split into two independent companies to optimize its portfolio. One company will focus on high-performing condiments, such as Heinz ketchup and other iconic sauces and spreads, allowing it to capitalize on strong growth potential. The other will encompass slower-growing grocery staples, providing stable cash flow. The separation will be executed via a tax-free spinoff by the second half of 2026. Both KHC equity and debt have short trading indicators from our trading model.
Elliott Investment Management's Stake in PepsiCo (PEP A1/A)
Elliott Investment Management has acquired a $4 billion stake in PepsiCo Inc. and proposes restructuring the beverage unit and reviewing the snacks portfolio. PepsiCo has stated it will evaluate Elliott's recommendations. Pepsico debt has a short indicator from our systematic trading model. The equity has a long indicator.
Air Lease Corp. Acquisition (AL BBB/BBB)
Air Lease Corp. has agreed to a $7.4 billion acquisition by a consortium led by Sumitomo Corp., including SMBC Aviation Capital and Apollo Global Management Inc. Air Lease investors will receive $65 per share in cash. The deal will position SMBC Aviation as the world's second-largest aircraft lessor. AL credit has a long trading indicator, AL equity has a long indicator.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 29% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: Our systematic credit trading indicator (IG and HY) remains slightly overvalued. 140, (the most in the 34 year history of the trading model) of the world's 255 largest issuers of corporate debt, are adding leverage to their balance sheets.
2025 10Y credit spreads: are unchanged YoY and wider YTD.
UST 10Y rates are +46 bp higher YoY and -28 bp YTD
Global Equity Correlation to IG Credit Spreads
USD credit and US equities declined Tuesday. It was the third trading day in the last week where US credit and equity risk direction correlated. 10Y credit and equity prices have correlated 134 out of 177 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
While credit fund inflows/bond retirements amounted to over $20 billion in the last week of August and first day of September, we saw $32.75 billion of supply from 15 G – 255 issuers on Tuesday in 37 transactions and included 16 bonds with market capital of $1 billion or more.
While two thirds of the bonds sold came from Yankee (non – US) issuers, the most compelling transactions came from Merck (MRK Aa3/A+ attractive long) and Cigna (CI Baa1/A-) who combined sold $9.75 bil of debt in 9 transactions.
Transaction Attractiveness
Trading model indicators show 34 of the 37 bonds as attractively priced.
Yankee Bank Issuers
The majority of the remaining supply originated from the lower end of the capital structure, primarily from Yankee bank issuers, including HSBC, Credit Agricole, Mitsubishi Financial, and ING. The trading model flagged all four transactions as attractive for long positions. However, underwriters appear to have pushed the limits of market capacity for Yankee bank supply, particularly with a French government no-confidence vote looming on Monday, which could influence market dynamics.
Auto Finance Deals
The market also saw four auto finance deals, three of which were Yankee trades. Concerns linger about potential impacts from the upcoming Monday vote. The trading model rated nine out of ten auto finance deals as attractive, with the Ford transaction (F, rated Ba1/BBB-) being the exception due to aggressive pricing.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 592, - 499 WoW. The systematic credit market indicator now slightly overvalued. The number of short indicators = (+26%) than the 200 day moving average.
Attractive long indicators: 95, +20 WoW (-17%) below the 200 day moving average.
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 of July through the 4th week of August, 25 long trades reached their avoid trading levels and were replaced by 11 new issue and new short trade indicators.
Systematic Credit Trading Strategy September 3, 2025
Closed Positions: last week, the long/short basket trade exited 1 new issue trade.
Enter New Longs: On Wednesday, the model indicator added The new Cigna (Baa1/A-) CI 4 7/8 09/15/32 issued on Tuesday and having the preferred 7Y maturity based on model indicators.
3. Enter New Short trades: The trading model indicators show adding at least 2 more new issue trades prior to adding any short trades.
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. Tuesday's Basket Trade long/ short ratio 60%
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
Wednesday Trading Indicator: The new Cigna (Baa1/A-) CI 4 7/8 09/15/32 issued on Tuesday and having the preferred 7Y maturity based on model indicators.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 2, 2025)
Total Trades: 150 (1% of total trades).
Performance Summary:
Long Indicators: 110/117 reached avoid-trading levels, tightening by -9.53 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 8 widened by +5.48 bp.
Remaining Shorts: 5 tightened by -14.34 bp.
Average Spread Movement: ±7.19 bp in the indicated direction.
Success Rate: 91% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.45 trading days) normal.
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.