Systematic Credit and Equity G-255 Trading Indicators for October 22, 2025
Good Morning! Equity futures are unchanged this morning, as are U.S. Treasuries. The stagnation in equities owes to new information gleaned from 11 of the world's largest corporates relating earnings and outlook yesterday. The stagnation in UST prices results more from a lack of any detailed economic information owing to the U.S. government shutdown.
Key Takeaways from Yesterday's Earnings Reports: Unit Volume Growth vs. Earnings Growth
We have now heard from 38 issuers, including last night's and this morning's European results. 20 of the 38 reports are from non-financial issuers.
Delta Airlines (DAL), United Airlines (UAL), CSX (CSX), PepsiCo (PEP), Coca-Cola (KO), Danaher (DHR), Elevance Health (ELV), and General Motors (GM) all reported materially improved operating results. What they didn't report was any significant improvement in units shipped, volumes, or capacity improvement. Texas Instruments (TXN) and Heineken (HEIA NA) reported this morning. Neither of those issuers is growing "organically."
What we also noted was pricing increases of 4 to 8% pricing growth on no unit volume growth. And so, to be fair, we are leaving out Philip Morris (PM), which had high single-digit unit and pricing growth, as well as the aerospace issuers General Electric (GE), Raytheon Technologies (RTX), and Northrop Grumman, which did have single-digit unit volume and pricing growth.
The key takeaway here is that the Trump trade tariffs, as well as 15,000 U.S. retail store closures in 2025, are starting to impact the U.S. economy, and without volume growth, most of the U.S.'s largest corporations aren't going to maintain "adjusted cash flow" growth for much longer.
Returns to Shareholders
We did see some of the largest G-255 issuers of debt and largest proponents of share repurchase over the past several years pull back. Specifically, Coca-Cola (KO), Raytheon Technologies (RTX), and Philip Morris (PM) have either pulled back or temporarily held off on further share repurchasing at current price levels.
Returning to our point about the traditional Buffett/Graham and Dodd styles of financial management, where the corporate balance sheet is used primarily for acquisition and growing cash flow, we did see a bit more of that in the first 38 G-255 earnings reports.
Short the Bonds / Buy the Equity
While our trading model is generating more of the "buy the stock, sell the bonds" indicators, we will provide a sector-by-sector total as the 247 reports that we expect over the next 7 weeks provide a more focused picture.
Credit Cracks
We saw Capital One (COF) report exceptional results post their acquisition of Discover Financial; three European banks and Barclays (BARC) reported this morning.
Zions Bancorp (ZION) and Western Alliance Bancorp (WAL) reported results on Tuesday after pre-announcing significant write-downs of loans to what appears to be a single borrower. Both equities closed higher on Tuesday.
Trading Model Output:
Credit trading indicators are 32% above average for short trade indicators and 47% below average for long trade indicators on Tuesday. Flows into credit ETFs and mutual funds fell by 50% in the week ended October 15. We will see ETF data for the week ended October 21 shortly.
Credit Market Model Indicators:
Both US Investment Grade and High Yield systematic trading indicators show USD credit as modestly overvalued. Similarly, the underlying equity value of 240 of the world's 255 largest issuers of corporate debt remains overvalued
Trading Model Indicators and Strategy for Wednesday:
After Tuesday's trading, the stochastic model continues to identify long opportunities in deleveraging new supply and deleveraging new supply trading behind new issue spreads. We see ETF credit flow data this AM.
Top 3 Short-Indicated Sectors:
US Big Six Banks (All currencies)
USD Single A Healthcare
Single A Industrials (USD)
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:
45% Long: Undervalued, deleveraging bonds.
35% 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. Wednesday's announcements from Zions Bancorp and Western Alliance Bancorp are examples of why this risk management guideline is in place.
Material Economic Indicators Reported Tuesday:
Same-store sales, rose 5% in the Oct. 18 week compared to a year earlier, Johnson Redbook says. That is the lowest reading since the last week of July.
Month-to-date sales through Oct. 18 rose 5.4%
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -11 % below average.
G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 96% of top 100 issuer volume and 76% of total TRACE volume.
High-Yield (HY) Trading
Volume: -6% above average.
G-255 Issuers: 15 of the top 25 traded bonds accounted for 56% of top 25 issuer volume and 62% of total TRACE volume.
Tuesday Credit Market Movement
U.S. CDX Index: +0.6 bp at 48.8 bp.
U.S. IG Cash Spreads: were unchanged to (+1bp) wider Technology underperforming.
CDX HY Index: fell -.1 @107.2 (per Bloomberg).
HY Cash Bonds: Were slightly wider Tuesday with no sector underperforming.
High-Yield Activity
• Dealers bought $800 million of high yield bonds on Tuesday.
Most Bought Warner Media (WBD Ba2/BB attractive long)
Most Sold HY Bonds: Transdigm Holdings (TDG Ba3/BB- attractive short)
Investment Grade Activity
Dealers bought $1.3 billion of IG bonds on Tuesday.
Most Bought Sector: Utilities
Edison Int'l (CM A2/BBB+ attractive short)
Pacific Gas& Elec (PCG Baa1/BBB attractive short)
Most Sold Sector: Single A Healthcare
United Healthcare (UNH A2/A attractive short)
Abbvie (ABBV A3/A- 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 158 undervalued bonds ($233.5 billion market value), with 61 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,388 bonds ($2.196 trillion) are overvalued per the stochastic credit trading model, with 664 short trade indicators.
U.S. Big 6 Banks (all Ratings): 307 bonds ($764.4 billion) overvalued, with 98 short indicators.
Single A and BB Energy: 99 bonds ($155.3 billion) overvalued, with 52 short indicators.
Single A Healthcare: 115 bonds ($167.6 billion) overvalued, with 72 short indicators.
Single A Industrials: 102 bonds ($112 billion) overvalued, with 53 short indicators.
G-255 Issuer News
GE Vernova Inc. has agreed to buy the remaining stake in Prolec GE that it doesn't already own for around $5.3 billion. The deal will allow GE Vernova to sell transformers in North America, which was previously limited by a non-compete contract.
GE Aerospace (GE A3/A- attractive short credit/attractive long equity) reported 3Q results on Tuesday.
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. Post earnings announcements from 32 of the world's 255 largest issuers of corporate debt record 140 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: -25 bp YoY and -63 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
U.S. equities and credit markets showed correlation on the first trading day in four. As noted yesterday, the correlation between 10-year USD credit spreads and U.S. equities is near a 32-year low of 74%.
While much of the lack of directional correlation in 2025 can be quantitatively explained by the disproportionate movement in equity index weightings of Technology, Healthcare, and Financial sectors compared to U.S. corporate bond indices, we have been asked whether our trading model indicates an erosion in the overall directional correlation between U.S. equities and corporate bond valuations.
The answer is a definitive no. The underlying equity remains a key component for hedging individual issuer and index CDS and CDX. As corporate bonds have finite returns (maturing at par or defaulting), the mathematical correlation between CDS and U.S. corporate issuers remains finite.
New USD G-255 supply and fund flow data
We have corrected errors from Monday's post-Q3 earnings reports regarding State Street Corp (STT), Truist Financial (TFC), and American Express (AXP) bank supply. The issuance size ($5.5 billion across four bonds), demand (Truist canceled its 4nc3 holdco offering), and aftermarket trading performance were lackluster.
Albertsons sold $1.5 billion in new bonds on Tuesday as the only G – 255 issuer. The new deal is to finance and additional ACI share repurchase and was attractively priced as a result according to our trading model indicators.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 656, -8 from Tuesday +38% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 61, +1 from Tuesday.
Systematic Portfolio Trading Model Indicators
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 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.
Systematic Credit Trading Strategy – October 21, 2025
Closed Positions: Last week, Broadcom (A3/A-) AVGO 4.8 02/15/36, added +5 bp behind new issue spread, reached its avoid trading level.
Enter New Longs: State Street (Aa3/A+) STT 5.784 10/23/36 was added as a long trade indicator as part of Monday's new supply.
Enter New Short Trades: The trading model indicators support adding short trades for each new long added.
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 re-leveraging issuers (avoiding 7-year maturities) at a 1:1 ratio for any additional long positions.
Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic strategy.
Tuesday's Basket Trade Long/Short Ratio: 63.6%
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: The State Street (Aa3/A+) STT 5.784 10/23/36 was added as long trade indicator.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 21, 2025)
Performance Summary: Total Trades: 172 (1% of total trades).
Long Indicators: 121/135 reached avoid-trading levels, tightening by -9.28 bp.
Short Indicators: 29/37 reached avoid-trading levels, widening by +5.62 bp.
Remaining Longs: 14 widened by +3.05 bp.
Remaining Shorts: 8 tightened by -10.91 bp.
Average Spread Movement: ±6.72 bp in the recommended direction.
Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20.2 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.