Systematic Credit and Equity G-255 Trading Indicators for October 9, 2025
Good Morning! US equities and corporate debt moved in slightly opposite directions on Wednesday, and this divergence is happening roughly 1 out of every 4 trading days. With the lack of US government economic data and the releveraging of global corporate balance sheets, in part to fund share repurchasing, the subtle but consistent divergence between the two asset classes is both discernible and quantitatively describable as we head into the 3Q earnings results season where we expect to see:
The word "adjusted" will appear in more reports in 3Q than at any other time on record. This is due to several issues, including the US market's ability to disregard Generally Accepted Accounting Procedures (GAAP) and the US equity market's willingness to ignore any type of valuation technique.
The only aspects of earnings results that have moved individual equity prices are: "analysts' expectations," how much additional AI spending will impact, and whether the issuer is raising forward earnings guidance.
We also expect significant "adjustments" based on the legal challenges to US trade tariffs and their impact on inventory accounting. Those are "real" adjustments.
Share buybacks and dividend increases relative to "real" operating cash flow will help determine how much new supply we see from each issuer.
2026 and 2027 earnings will come into focus. However, as noted above, the equity market doesn't pay any attention to those numbers any longer. AI and "adjusted expectations," as well as corporates buying their outstanding equity at all-time high prices along with ETF/mutual fund inflows, are what is driving US equity prices today.
Issuer not buying back their own equity.
Berkshire Hathaway (BRK, attractive long for both credit and equity) didn't pay a dividend last quarter, and it didn't repurchase any of its own shares in 2Q 2025. BRK equity is up 10.3% this year, trailing the S&P by 450 bp. It has no exposure to AI, and it just announced it will pay $9.7 billion for the OxyChem division of Occidental Petroleum. While the BRK $900 billion balance sheet dwarfs the acquisition size, the purchase alone drives OxyChem's funding costs (-300 bp) lower year-over-year. So, is the return on the OxyChem purchase better than buying back stock near all-time highs? Well, the markets don't think so. BRK equity is down 7.4% since May 2.
Since we have mentioned other equities in our daily reports and model indicators are about to change, the top 3 equity long model indicators are BRK, Pfizer (PFE), and Energy Transfer (ET). As for short trade indicators, we will need to see 3Q earnings first.
Trading Model Output
The trading model is no longer within 5bp of signaling "significantly overvalued." For US credit spreads to widen significantly, retail credit fund outflows and declining US equity prices would be required. The model reacts to market conditions, buying volatility, and the key question is how Q3 earnings and outlooks will impact equity prices.
Please note that the trading model does not predict; it reacts and is a buyer of volatility. The question remains: what impact will Q3 reported earnings and outlooks have on equity prices?
Credit Market Model Indicators
Both US Investment Grade and High Yield systematic trading indictors show USD credit as overvalued but not extended. Similarly underlying equity value of 240 of the world's 255 largest issuers of corporate debt remain overvalued but not yet at short trade indicator levels on an overall basis..
Trading Model Indicators and Strategy for Thursday
Corporate bond flows for the week ending October 7 were roughly flat when compared with the week ended September 30. After Wednesday's trading, the stochastic model views valuations as overvalued, identifying long opportunities only in deleveraging supply trading +2bp or more behind new issue spreads.
Top 3 Short-Indicated Sectors
Single A Industrials (USD)
USD Single A Healthcare
Single A Energy (USD)
Top 3 Long-Indicated Sectors
Yankee French Banks (USD/EUR)
U.S. BBB/BB TMT (USD/EUR)
U.K. Banks (all currencies)
Trading Allocation Strategy
42% Long: Undervalued, deleveraging bonds.
38% Short: Overvalued bonds in releveraging sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days due to global regulatory requirements for material event disclosures.
Material Economic Indicators
Retail Sales
Sales at stores open at least a year, or same-store sales, rose 5.8% in the week ending October 4, 2025, compared to a year earlier, according to Johnson Redbook. September sales are expected to be up 6.3% over the same month of the previous year. "Discount stores have performed well throughout the week, buoyed by essentials such as food and household supplies," according to Johnson Redbook.
US Rail Traffic
US rail traffic for the week ending October 4, 2025, was 503,538 carloads and intermodal units, up 3.6% compared with the same week last year. Total carloads for the week ending October 4 were 224,972, up 0.002 % compared with the same week in 2024, while US weekly intermodal volume was 278,566 containers and trailers, up 6.7 % compared to 2024.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -11% below average.
G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 78% of total TRACE volume.
High-Yield (HY) Trading
Volume: average.
G-255 Issuers: 15 of the top 25 traded bonds accounted for 58% of top 25 issuer volume and 64% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: +.5 bp at 47.6 bp.
U.S. IG Cash Spreads: were unchanged to (+1bp) wider with US Financials underperforming.
CDX HY Index: fell -.1 @107.65 (per Bloomberg).
HY Cash Bonds: Were wider led by BB TMT.
High-Yield Activity
• Dealers bought $1 billion of high yield bonds on Wednesday.
Most Bought HY Bonds: Encore Capital (ECPG Ba1/BB+)
Most Sold HY Bonds: CSC Holdings (CSCHLD Caa1/CCC+ attractive long)
Investment Grade Activity
Dealers bought $700mm IG bonds on Wednesday.
Most Bought Sector: Single A Healthcare
Eli Lily (LLY Aa3/A+ attractive short)
Thermo Fisher (TMO A3/A- attractive short)
Most Sold Sector: Big 6 Banks
Wells Fargo (WFC A2/Baa1 attractive short)
Goldman Sachs (GS A2/Baa1 attractive short)
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 Insight: The stochastic credit trading model identifies 112 undervalued bonds ($156.9 billion market value), with 35 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,543 bonds ($2.38 trillion) are overvalued per the stochastic credit trading model, with 1082 short trade indicators.
U.S. Big 6 Banks (All Ratings): 311 bonds ($773.7 billion) overvalued, with 215 short indicators.
Single A and BB Energy: 103 bonds ($160.4 billion) overvalued, with 63 short indicators.
Single A Healthcare: 101 bonds ($150.3 billion) overvalued, with 82 short indicators.
Single A Industrials: 100 bonds ($110 billion) overvalued, with 76 short indicators.
G-255 Issuer News
HSBC Holdings Plc (HSBC A2/A- attractive long both credit and equity) plans to take Hang Seng Bank Ltd. private in a deal that values the lender at $37 billion. The price was set at HK$155 a share in cash, a premium of about 30% over the last closing price, and the publicly listed shares would be canceled under the proposal.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 38% of the widening observed from November 12, 2024, to April 10, 2025.
Model Valuation: IG and HY markets show overvaluation. A record 140 of the world's 255 largest corporate debt issuers are increasing leverage. 3Q earnings season starts today.
2025 10-Year Credit Spreads
Year-over-Year (YoY): Wider compared to last year.
Year-to-Date (YTD): Wider YTD.
UST 10-Year Rates: Up +5 bp YoY but down -45 bp YTD.
Bloomberg 10Y credit spreads are derived by taking the Moody's relevant index Yield and subtracting the UST 10Y YTM
Global Equity Correlation to IG Credit Spreads
US equities and credit markets moved in opposite directions for the 6th day in 20, as US equity prices rose and credit spreads widened Wednesday. The historical 80% directional correlation between US equity prices and US HY and IG credit spreads has weakened in 2025 due to changes in sector weightings in US equity and bond indices and the inclusion of non-US (Yankee) issuers in bond indices. Corporate credit continues to tighten despite the US government shutdown, supported by limited new supply. US equities typically rally following government shutdowns.
New USD G-255 supply and fund flow data
Net inflows to ETFs totaled $14.4b in the week ended Oct. 7, 2025, including the effect of leveraged funds, compared with $9.53b the prior week
Broad bond-market ETFs expanded by $1.2b to $4.49b
Government bond ETFs expanded by $3.65b to $4.02b
Dedicated investment grade ETFs rose by $122mm to $644 mm
Dedicated non – investment grade ETFs rose by $105mm tp $1.602 bil
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1047, +25 from Wednesday +97% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators: 35, +2 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.
Short Positions: Target re-leveraging issuers trading at the deepest discount from their model avoid point, avoiding 7-year maturities due to low attractiveness.
Replace Longs: Swap long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 62.5% long position threshold is reached.
Current Status: Do not add to recent deleveraging new supply trades; instead add new issue bonds where spreads widened by +2 basis points.
Current Status of trading indicators below:
Last week 1 short trade reached its avoid trading level and was replaced by 3 new secondary short indicators, while 2 new long trade indicators were added.
Systematic Credit Trading Strategy October 9, 2025
Closed Positions: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level on Tuesday
Enter New Longs: Monday the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread.
3. Enter New Short trades: Last week's short indicator was the BP (A2/A) BPLN 3.06 06/17/41. The trading model indicators show adding short trades and for each new long added.
4. Monitor Trade Position 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 62.5% 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. Thursday's Basket Trade long/ short ratio 60.8%
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
New Trade Indicators Wednesday: None
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 9, 2025)
Performance Summary: Total Trades: 171 (1% of total trades).
Long Indicators: 120/134 reached avoid-trading levels, tightening by -9.31 bp.
Short Indicators: 28/35 reached avoid-trading levels, widening by +5.5 bp.
Remaining Longs: 14 tightened by -.82 bp.
Remaining Shorts: 9 tightened by -12.46 bp.
Average Spread Movement: ±6.85 bp in the indicated direction.
Success Rate: 86% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20 trading days) below 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.