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Tue, October 28, 2025

Systematic Credit and Equity G-255 Trading Indicators for October 28, 2025

Good Morning! A few errors in Monday's reports regarding the attractive levels on Philip Morris (PM) 7- and 10-year new supply have been corrected in this morning's report. Monday saw a material advance (again to all-time highs) in US equities and positive traction in US credit markets, slowed by over $24 billion of new supply. There was $14 billion of new G-255 supply (20 bonds). We were asked about Amphenol (A3/A-), which is not a G-255 constituent. The company should have $15 billion of tradable debt after yesterday's $8 billion offering. Historically, we have added issuers exceeding the $15 billion market cap hurdle only after they report results with more than $15 billion of on-balance-sheet debt.

Monday and Tuesday Earnings reports

Keurig Dr Pepper (KDP Baa1/BBB) reported strong unit volume growth in the beverage segment and weaker unit volume growth in the coffee segment. Overall pricing was +4.5%. KDP is undergoing a series of transactions that will ultimately split the company into a beverage issuer and a coffee company.

Pemex (PEMEX Ba1/BBB) reported strong downstream volumes and negative pricing. The company received an equity infusion from the Mexican government, enabling PEMEX to repurchase bonds to a level where they are not particularly attractive. See the October 27 earnings digest for details on both issuers.

Earnings reports from HSBC (HSBC A3/A-), BNP (BNP Baa1/A-), and Novartis (NOVNVX Aa3/AA-) showed slower net income growth in regions with lower interest rates and strong pricing growth for therapies in high demand.

Issuer Credit indicator Equity Indicator

Pemex (PEMEX B1/BBB attractive long) unchanged NA

Keurig Dr Pepper (KDP BBB/Baa1 attractive short) unchanged Long @ current price

HSBC (HSBC A3/A- attractive long) unchanged Long @ current price

BNP (BNP Baa1/A- attractive short) change Long @ current price

Novartis (NOXNVX /AA3/AA- att long) change Long below CHF 98/shr

New Supply:

Four of the five G-255 issuers that reported results on Friday sold bonds on Monday. HCA (Baa2/BBB-) saw the most demand, with new supply ($3.25 billion) priced through the HCA secondary trading curve. Our trading model still identifies HCA equity as a long trade indicator and HCA credit as a short.

The cheapest bonds relative to their secondary trading curve were those sold by Procter & Gamble (PG Aa3/AA-). When secondary bonds trade +30bp to USTs, selling bonds +5 to +7bp behind secondary is cheap, but only on a relative basis.

Trading Model Output:

Credit trading indicators returned to 74% above average for short trade indicators and 60% below average for long trade indicators on Monday. The model made additional sector indicator changes overnight.

Credit Market Model Indicators:

Both US Investment Grade and High Yield systematic trading indicators show USD credit as overvalued. Similarly, the underlying equity value of 237 of the world's 255 largest issuers of corporate debt remains overvalued. The model's overall credit long/short indicators changed overnight.

Trading Model Indicators and Strategy for Tuesday:

After last week's US ETF and mutual fund flow data, the stochastic model continues to identify long opportunities in deleveraging new supply and deleveraging new supply trading behind new issue spreads.

Top Short-Indicated Sector:

BBB Autos (All currencies)

Top 3 Long-Indicated Sectors:

US Regional Banks (USD)

U.S. Single A TMT (USD/EUR)

U.K. BBB TMT (all currencies)

Trading Allocation Strategy:

47.5% Long: Undervalued, deleveraging bonds.

32.5% 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 Reported Monday:

  • Dallas Federal Manufacturing outlook improved in October to -5.0 vs. -8.5 in September.

  • Capacity utilization, new orders, and unfilled orders declined in October but at a slower pace than in September.

  • Prices paid and received remained above normal but were lower month-over-month.

Investment-Grade (IG) Trading

  • Volume: -6 % below average.

  • G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 79% of total TRACE volume.

High-Yield (HY) Trading

  • Volume: +6% above average.

  • G-255 Issuers: 16 of the top 25 traded bonds accounted for 63% of top 25 issuer volume and 70% of total TRACE volume.

Monday Credit Market Movement

  • US CDX Index: -1.6 bp at 45.9 bp (includes -4 bp of forward roll)

  • US IG Cash Spreads: -1 to -2 bp tighter, with IG financials

  • CDX HY Index: +0.3 bp at 107.8 (per Bloomberg)

  • HY Cash Bonds: Tighter Monday, with non-IG utilities outperforming

High-Yield Activity

• Dealers bought $1.3 billion of high yield bonds on Monday.

  • Most Bought HY Bonds: Dish Holdings (DISH Caa1/CCC+ attractive long)

  • Most Sold HY Bonds: Clear Channel Outdoor (CCO Caa3/CCC)

Investment Grade Activity

  • Dealers bought $1 bil of IG bonds on Monday.

  • Most Bought Sector: Big 6 Banks

Bank of America (BAC A1/A- attractive short)

Goldman Sachs (GS A2/BBB+ attractive short)

  • Most Sold Sector: BBB TMT

Oracle (ORCL Baa2/BBB attractive short)

T-Mobil (TMUS Baa1/BBB 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 129 undervalued bonds ($184.2 billion market value), with 41 long trade indicators across the 6,000-bond USD universe.

Short Opportunities

  • 1,418 bonds ($2.222 trillion) are overvalued per the stochastic credit trading model, with 878 short trade indicators.

  • U.S. Big 6 Banks (all ratings): Are no longer a sector short trade indicator as of October 22.

  • Single A and BB Energy: Are no longer a sector short indicator as of October 27.

  • Single A Healthcare: Is no longer a sector short trade indicator as of October 22.

  • Single A Industrials: Are no longer a sector short trade indicator as of October 22.

  • BBB Autos: 76 bonds ($92.1 billion) overvalued, with 63 short trade indicators

G-255 Issuer News Monday

Paramount Skydance Corp. (PARA Baa3/BB+ attractive short credit/long equity) plans to keep much of Warner Bros. Discovery Inc. intact if it merges with the rival film and TV studio, including the creative teams of both studios. There are no plans to sell or spin off the cable networks of the two businesses.

U.S. IG Credit Valuation and Spreads

U.S. IG Credit Valuation and Spreads

  • Credit Spread Recovery: U.S. credit spreads have recovered 41.6% of the widening observed from November 12, 2024, to April 10, 2025.

  • Model Valuation: IG and HY markets show modest overvaluation. Post earnings announcements from 64 of the world's 255 largest issuers of corporate debt record 137 are increasing leverage.

2025 10-Year Credit Spreads

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

  • Year-to-Date (YTD): are wider.

  • UST 10-Year Rates: -30 bp YoY and -59 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 showed correlation for a fifth consecutive trading day, with the magnitude of the equity advance outpacing credit improvement due to over $24 billion of new bond supply in the US on Monday. While the correlation between US equity prices and 10-year US credit spreads is a mathematical certainty, the number of trading days when the direction of the two markets varies in a given year depends on exogenous factors. The statistical average of directional correlation between the SPX and US credit spreads is close to 80% over the past 33 years, with a range of 74% to 83%.

New USD G-255 supply and fund flow data

With US equities in full risk-on mode, seven G-255 issuers sold 20 bonds totaling $14 billion, with only $2 billion of supply from financial issuers.

HCA's new supply saw the greatest demand and was aggressively priced according to our trading model, following strong Q3 results reported on Friday. However, the new supply was priced well inside the existing trading curve and did not trade well in the grey despite a Moody's upgrade to Baa2 last Wednesday.

The most reasonably priced new supply on Monday was the Lloyds 6 5/8 PERP, the only non-change-of-control (COCO) supply greater than $100 million in the USD Lloyds trading structure. Procter & Gamble bonds were also reasonably priced (relative to existing bonds) according to our trading model.

Only 5 of the 20 G-255 bonds sold had a market cap of $1 billion or above.

Systematic Trading Model Indicators and Strategy

  • Attractive Long Indicators: 41, -2 from Monday and -48% below the 200 day moving average of all model long trade indicators.

  • Attractive Short indicators 877, +54 from Monday and +74% above the 200 day moving average of all model short trade indicators

Systematic Portfolio Trading Model Indicators

  • Prioritize Long Positions: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.

  • Short Positions: Target releveraging 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 65% long position threshold is reached.

  • Current Status: Add new supply trades where the issuer is deleveraging; add new issue bonds where spreads widened by +2 basis points.

  • Current Status of Trading Indicators: Last week, one long trade reached its avoid trading level. The trading model added three long indicators and one short indicator.

Systematic Credit Trading Strategy – October 23, 2025:

  • Closed Positions: Capital One (Baa1/A-) COF 5.197 09/11/36 additions +2 bp and +4 bp to NIP reached their avoid trading level on Monday.

  • Enter New Longs: On Monday, Broadcom (A3/A-) AVGO 4.8 02/15/36 +2 bp from NIP was added as a new long indicator. The model added new issues Philip Morris (A2/A-) PM 4 1/4 10/29/32 and Lloyds Bank (Baa3/BBB-) LLOYDS 6 5/8 PERP as long trade indicators.

  • Enter New Short Trades: The trading model added General Motors Financial (Baa2/BBB) GM 2.7 06/10/31 (short indicator) post new GM supply on last Wednesday.

Monitor Trade Position Composition:

  • Track the percentage of long positions relative to the total portfolio.

  • If replacing long positions that have reached their avoid trading level pushes the portfolio above the 65% long hurdle, initiate short positions in releveraging issuers (avoiding 7-year maturities) at a 1:1 ratio for additional long positions.

  • Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic strategy.

Monday's Basket Trade Long/Short Ratio: 65.3%

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 Monday: Capital One (Baa1/A-) COF 5.197 09/11/36 additions +2bp and +4bp to NIP reached their avoid trading level. The trading model adds Broadcom (A3/A-) AVGO 4.8 02/15/36 +2bp from NIP as new long indicator. The model adds new issues Philip Morris (A2/A-) PM 4 1/4 10/29/32 and Lloyds Bank (Baa3/BBB-) LLOYDS 6 5/8 PERP as long trade indicators.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 27, 2025)

Performance Summary: Total Trades: 176 (1% of total trades).

  • Long Indicators: 122/138 reached avoid-trading levels, tightening by -9.27 bp.

  • Short Indicators: 29/38 reached avoid-trading levels, widening by +5.62 bp.

  • Remaining Longs: 16 tightened by -1.29 bp.

  • Remaining Shorts: 9 tightened by -13.41 bp.

  • Average Spread Movement: ±6.80 bp in the indicated direction.

  • Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.

  • Average trade holding period: (20.5 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.