Systematic Credit and Equity G-250 Trading Indicators for May 5, 2025
Indicators
The report
Good Morning. First, some corrections. Shell (RDSALN) YoY net debt is +$1.255 billion higher (@$41.238 bil), not +$9 bil. Second, there were several math errors in our non-financial and overall reported balance sheet data in Friday afternoon's report. We have remedied those errors.
Given the number of pieces of information associated with our systematic trading summary and indicators this morning, we will go through macro issues first, the key question about our trading model second, and reported results and their impact on trading valuations and indications third.
Trump tariff talk
Much as we avoid political rhetoric, separating the "truth" from the "fiction" to get to trading output requires numeric conclusions that may read as partisan. Not here. Tariffs are temporary (and reversible) costs to any global corporate. Given the public nature of the US effort to negotiate, it has become apparent that the tariffs will not lead to more investment in the US (perhaps less) and have created incremental demand and supply of capital in non-US currency.
As to the economic impact, we are 2–4 months from the first indications. As for this week, focus will be on April US inflation indicators in ISM data and NY 1-Yr inflation expectations.
We also expect some comments from the US Fed post the FOMC meeting Wednesday and a better indication of the labor market with the first reading of US initial jobless claims on Thursday. Our take on recent Fed President commentary portending potential interest rate cuts in June? A: Purely political.
De-levering, Re-levering balance sheets and our Trading Model
As for the key question about our trading model: "What's with the obsession with balance sheet leverage direction?" A: While balance sheet direction is one of five basic data hierarchies within our global trading model, bonds of underlying issuers (held as long positions) that are "de-levering" after a given quarter's results have been announced outperform bonds of issuers that are "re-levering" by about 27% (in bp terms) over the following 60 calendar days. Similarly, bonds of issuers (held as short positions) that are "re-levering" widen in spread terms by roughly (+32%) more than bonds that are "de-levering."
If there are fewer issuers de-levering, does that imply more attractive short Indicators?
A: Only when the bonds of the underlying issuer trade within 20% of their 52-week tight spread. And we are a long way from that valuation level.
Earnings Season
Thus far, 148 of the 228 largest issuers of corporate debt have reported results for the period ended 3/31/25. 22 issuers will not report March results as they only report balance sheets for June and December. So far, we have 138 of the 148 issuer data written up (we don't add the reported data to our model unless we have published the result first). The integrity of the output is paramount. We have only published revenue growth and shareholder payouts of non-financial issuers thus far, owing to the lack of disclosure of cash flow in so many bank earnings announcements.
For the 126 issuers that we have balance sheet data on, we see $9.5 trillion of debt, which is divided as follows: $2.4 trillion issued by 20 US financial institutions, $3.63 trillion issued by 15 non-US financial institutions, and $3.471 trillion issued by 92 global non-financial issuers.
As for quick conclusions: First, US banks are growing their balance sheets faster than any other sector. The 15 non-US financial institutions that have reported results have $164 billion more cash than debt. Thus far, of the 92 non-financial issuers that have reported results, net debt is growing by only 1.19% QoQ.
At the same time, global non-financial issuers are paying out capital to shareholders at a rate 3x faster than their year-over-year revenue growth.
Friday's US IG Credit Trading:
Both cash and the IG CDX were (-3bp) tighter on Friday. In fact, some sectors traded as much as (-8bp) tighter in the Auto and Subordinated finance sectors. However, energy bonds were the best performers post Shell (RDSALN), Exxon Mobil (XOM), and Chevron (CVX) reported results.
Volumes were again below average for a Friday, with end users buying almost $1 billion USD IG bonds. Financials and Energy were the most bought sectors, and Bank of America (BAC), JPMorgan (JPM), and Wells Fargo (WFC) were the most bought issuers on Friday.
How to trade Earnings Season
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.
The trading model prefers non-US banks as its top sectors and bonds for attractive long indicators.
Issuer News over the Weekend
Shell Plc (RDSALN) is working with advisers to evaluate a potential acquisition of BP Plc, waiting for further stock and oil price declines before deciding whether to pursue a bid.
Airlines: The Trump administration is planning to release a proposal to modernize the US air traffic-control system, which will include upgrades to air traffic control systems and facilities and require billions of dollars in new funding from Congress.
Chevron Corp (CVX) has notified Phillips 66 of its interest in buying out the refiner's 50% interest in their chemicals joint venture, Chief Executive Officer Mike Wirth said on a call with analysts.
Inflation Readings and Government Bonds
April Non-farm payrolls were 177k vs. a revised 185k for March. The unemployment rate was 4.2%, and labor-force participation increased. YoY hourly wages were +3.8%, flat with March.
The UST 10Y remains (-26.1 bp) lower in yield YTD.
U.S. IG Credit Valuation
US investment-grade (IG) credit continues to be the "most attractive" for long credit Indicators for the 33rd consecutive trading day. See details in the Model output section below.
According to Bloomberg, overall US IG credit spreads have tightened by (-12 to -14bp) since our trading model hit its largest "long only" attractive reading in 5 years.
The model also indicates that we would need (-6 to -10bp) of additional index credit spread tightening prior to the "Long Only" output changing.
Global Equity Correlation to IG Credit Spreads
We saw 88% correlation between USD 10Y credit spreads and equity index movement. Oddly enough, the most correlated sectors were Japanese and French banks. However, US technology corporate spread correlation to underlying equity movement was over 80% on Friday.
New Supply / Bond Maturities / Credit Fund outflows for May
Thus far, we have seen 168 new deals come from 111 of the 250 largest issuers of corporate bonds in 2025. The 433 tranches of debt total $321 billion, with 31.7% of the USD debt sold coming from non-financial issuers. The 2025 supply trails 2024 YTD supply by just over 22%.
We saw 13 bonds in our G250 trading universe ($22.25 billion) called or retired over the last 3 days of last week. With the majority of those retirements in Big 6 banks, this partially explains the performance of that sector.
Systematic Trading Model Indicators – Weekend
We saw US IG spreads tighten considerably (-3 to -8bp) on Friday. At the same time, we saw equity prices of issuers that had been trading (-10%) in price MoM for several weeks finally reach prices that created 10 additional attractive long Indicators that did not exist on Friday.
With fewer of the world's largest corporations de-levering their balance sheets in 1Q 2025 than in any other quarter since 1Q 2020, there are fewer potential bonds (roughly 2,400) and market capitalization ($2.1 trillion thus far) for the model to generate "attractive long" or "position long" trading Indicators.
The model maintains its "long-only" stance across its 6,200-bond, 250-issuer USD large-cap universe for the 33rd consecutive trading day. Attractive short Indicators remain near five-year lows, with over 78% of model positions classified as attractive long.
Attractive Trading Sectors
Attractive Long Trading Sectors: Single A and BBB-rated TMT, UK banks, French banks, BBB Energy, US Regional, 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 (+10bp) wide of attractive short trading levels. Single A Industrials (-12bp) tighter, US Big 6 banks are also attractive short trading indicators (-6 to -8bp) 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 Barclays (Baa1/BBB+) BACR 5.785 02/25/36 (a "double down" from a pre-February 24 recommendation), Lloyds (A3/BBB+) LLOYDS 5.721, Credit Agricole (A3/A-) ACAFP 5.23 01/09/29, and Broadcom (Baa1/BBB+) AVGO 5.2 04/15/32, all based on recent reported earnings and model output over the weekend as the most attractive long indicators of the 183 created.
Walmart (AA2/AA) WMT 4.35 4/28/30 reached its avoid trading level on Friday.
Friday Sample Trading Indicators with Credit Spread Movement
Since February 24, we've published 32 secondary and new-issue trading indicators from our model:
• 13 indicators have reached their avoid-trading level.
• The remaining 19 indicators have widened by an average of +3.3 bp.
• Across all 31 indicators, credit spreads are (-1.8bp) tighter
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 30 bp on average since being indicated.
• They currently trade at 155 bp over the UST curve, with an 8.2-year duration.
• Our model projects an average spread tightening of -35.3 bp remaining.
• Six are single-A rated and have widened by +20.7 bp since being indicated.
• They now trade at 113.1 bp over the UST curve, with a 10.7-year duration.
• The trading model indicates an average spread tightening of -24.9 bp remains.
Earnings results later Today
ONEOK INC (OKE, Baa2 / BBB)
• ONEOK reported higher-than-expected revenue growth and lower-than-expected operating and net earnings. Management affirmed 2025 earnings guidance.
• Financial Position: Cash flow from operations was just slightly below overall cash expense, including returns to shareholders. That said, the company is de-levering slightly as of 3/31/25.
• Model Trading Indicates: Our trading model hasn't made an "attractive long" OKE indicator in over 2 years. However, there are 5 attractive long OKE secondary bonds at present, with the OKE 6.05 09/01/33 the most attractive.
TC Energy (TRPCN, Baa2 / BBB+)
• TRPCN reported comparable earnings of $1.0 vs. $1.1 in 1Q 2024. Neither revenue nor net income met analysts' expectations. The company reiterated cash flow guidance of $10.7 to $10.9 billion and a lower-than-2024 net earnings number.
• Financial Position: Net and total debt at TC Energy are shrinking. We took a picture of the balance sheet, as we don't see TRPCN de-levering very often.
• Model Trading Indicates: Our trading model sees 7 undervalued TC Energy secondary bonds, with the TRPCN 7 5/8 01/15/39 and the entire bottom end of the TRPCN trading curve attractive.
Danske Bank (DANBNK, Baa1 / A- SNP)
• Danske Bank reported mostly flat 1Q revenue and earnings. They also reported an 18.3% CET1 capital ratio and affirmed earnings guidance for 2025. Deposits are growing, and loan quality is stable.
• Financial Position: Given Danske's capital strength, it is unusual for the bank to de-lever. However 3/3/25.
• Model Trading Indicates: There are only 11 liquid USD Danske Bank secondary bonds. Our trading model sees the DANBNK 4.298 04/01/28 as the most attractive
Canadian Pacific (CP, Baa1 / BBB+)
• Reported 5.9% 1Q revenue growth and 17% operating earnings growth. Reported results exceeded expectations, but the company revised 2025 results lower by about (-10%) owing to US trade tariffs.
• Financial Position: While the CP balance sheet is stable, the company is not reducing debt.
• Model Trading Indicates: Our credit trading model sees the CP secondary trading curve as an attractive short trading indicators (-10 to -15bp) tighter from current levels.
DTE Energy (DTE, Baa2 / BBB)
• DTE reported 1Q revenue and operating earnings that met expectations and affirmed earnings guidance of over $7 per share.
• Financial Position: The DTE balance sheet continues to de-lever as the company winds down its non-regulated business platform.
• Model Trading Indicates: There are only 3 bonds in the DTE secondary trading structure with $1 billion of market cap or more. Our credit trading model sees the DTE 5.1 03/01/29 as the most attractive.
Bausch Health (BHCCN, NA / B-)
• Bausch reported 1Q revenue growth of 4% YoY and an operating loss. While the company raised 2025 revenue guidance, it did not raise cash flow or earnings guidance.
• Financial Position: BHC is again using capital and borrowed funds to do so.
• Model Trading Recommendation: There are 2 attractive short trading recommendations in the BHC secondary structure from our trading model. The BHCCN 6 1/8 02/01/27 is considered the most attractive.
Merck (MRK, Aa3 / A+)
• Merck filed its 10-Q on Friday.
• Financial Position: Merck continues to reduce net debt.
• Model Trading Indicates: Our trading model sees 8 Merck bonds as undervalued, but only 3 have coupons of 4% and above. Accordingly, the trading model sees the MRK 5.15 05/17/63 as the most attractive long Indicator.
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.