Systematic Credit and Equity G-255 Trading Indicators for October 8, 2025

Key Metrics –

1. Approximately 84% of the bonds (82% of the market capital) in LQD are covered within the G-255 trading universe used by our trading model.

2. LQD security selection (based on credit quality) ranks in the top 10% of all funds reviewed.

3. LQD liquidity (based on market capital and daily trading volume) ranks in the top 5%.

4. LQD coupon dispersion (first derivative of interest rate risk) and

5. LQD overall DV01 result in interest rate volatility below that of the broader corporate bond market.

6. LQD's rotation into different quality ratings (Single A and BBB) is exceptional given the fund's size.

7. LQD is significantly underweight Yankee bonds across all sectors and has no exposure to French banks.

8. LQD is also underweight financials in general. However, the fund has significant exposure to financial names with less than $15 billion in tradable market capital.

9. LQD tends to materially overweight TMT, US Industrials, and Healthcare.

10. LQD has virtually 0 exposure inside to 2029 maturities.

Possible Trades Employing LQD

Credit Short: Sell CDX IG inside 46.7 / Buy LQD – LQD's underweighting of financials and Yankee bonds will outperform in a credit spread-widening environment.

Credit Long: Buy LQD + 2 of the 6 following equities (HSBA LN, STAN LN, ACA FP, BNP FP, DBY GR). These equity purchases would offset the underweight in financials and Yankee bonds.

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

Longer-dated spreads remain slightly wider than the five-year tights observed in November 2024. New supply from deleveraging issuers offers the primary attractive long trade opportunities.

Trading Model Indicators and Strategy for Wednesday

Corporate bond flows for the week ending October 7 will be known today and tomorrow and will help determine this week's trading allocation indicators. While US credit spreads approached 2025 tights on Monday, after Tuesday'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.

Tuesday's U.S. Credit Trading

Investment-Grade (IG) Trading

• Volume: -21% below average.

• G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 77% of total TRACE volume.

High-Yield (HY) Trading

• Volume: -3% below average.

• G-255 Issuers: 13 of the top 25 traded bonds accounted for 54% of top 25 issuer volume and 60% of total TRACE volume.

Thursday Credit Market Movement

• U.S. CDX Index: +.5 bp at 47.1 bp.

• U.S. IG Cash Spreads: were unchanged to (+2bp) wider with US TMT underperforming.

• CDX HY Index: fell -.1 @107.75 (per Bloomberg).

• HY Cash Bonds: Were wider led by BB Consumer.

High-Yield Activity

• Dealers bought $1.2 billion of high yield bonds on Tuesday.

• Most Bought HY Bonds: EchoStar Corp (SATS Caa1/B attractive long)

• Most Sold HY Bonds: NRG Energy (MRG Ba2/BB attractive short)

Investment Grade Activity

• Dealers bought $1.2 billion IG bonds on Tuesday.

• Most Bought Sector: Big 6 Banks

Wells Fargo (WFC A2/Baa1 attractive short)

JP Morgan (JPM A1/A+ attractive short)

• Most Sold Sector: Canadian and US Regional Banks

Toronto Dominion (TD A2/A- attractive long)

PNC Financial (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 Insight: The stochastic credit trading model identifies 109 undervalued bonds ($156.7 billion market value), with 33 long trade indicators across the 6,000-bond USD universe.

Short Opportunities

• 1,543 bonds ($2.393 trillion) are overvalued per the stochastic credit trading model, with 1091 short trade indicators.

• U.S. Big 6 Banks (All Ratings): 310 bonds ($772 billion) overvalued, with 209 short indicators.

• Single A and BB Energy: 101 bonds ($160 billion) overvalued, with 62 short indicators.

• Single A Healthcare: 100 bonds ($149.4 billion) overvalued, with 81 short indicators.

• Single A Industrials: 100 bonds ($110 billion) overvalued, with 71 short indicators.

G-255 Issuer News

SoftBank Group Corp.(SOFT BB+ attractive short credit/ attractive long equity) will acquire ABB Ltd.'s industrial robots unit at an enterprise value of almost $5.4 billion, ABB announced it was abandoning an earlier intention to spin off the business into a separately listed entity and expects the deal with Softbank to close in mid- to late 2026.

U.S. IG Credit Valuation and Spreads

U.S. IG Credit Valuation and Spreads

• Credit Spread Recovery: U.S. credit spreads have recovered 48% 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, the highest in the model's 34-year history.

2025 10-Year Credit Spreads

• Year-over-Year (YoY): Wider compared to last year.

• Year-to-Date (YTD): Wider YTD.

• We are no longer within range of 2025 tight spreads.

• UST 10-Year Rates: Up +11 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 the same direction for the 14th day in 19, as US equity prices sold off and credit spreads widened Tuesday. 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

No new 2 G-255 issuers on Tuesday with only T - Mobil (TMUS) and Toronto Dominion selling bonds so far this month.

The lack of new supply owing the SEC shutdown combined with credit fund inflows and almost $20 billion of G-255 issuer bond retirements is pushing USD credit spreads toward their overall 2025 tight levels.

Systematic Trading Model Indicators and Strategy

• Attractive Short Indicators: 1020, -71 from Tuesday +97% above the 200 day moving average of all model short trading recommendations.

• Attractive Long indicators: 33, +8 from Tuesday.

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 8, 2025

1. Closed Positions: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level on Tuesday

2. Enter New Longs: Monday the trading model adds 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. Wednesday'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 Tuesday: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level on Tuesday

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 8, 2025)

Performance Summary: Total Trades: 171 (1% of total trades).

• Long Indicators: 119/134 reached avoid-trading levels, tightening by -9.34 bp.

• Short Indicators: 28/35 reached avoid-trading levels, widening by +5.5 bp.

• Remaining Longs: 15 tightened by -1.43 bp.

• Remaining Shorts: 9 tightened by -12.47 bp.

• Average Spread Movement: ±6.87 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.