Systematic Credit and Equity G-255 Trading Indicators for October 13, 2025
Good Morning! With US bond markets closed on Monday, we can only comment on Friday's trading in the US and how non-US markets are shaping up over Sunday night. US equity futures are in "straight up" mode as global markets are "buying the dip" from Friday. The same is true for European equity futures, while Asian trading is reacting to Friday's US trade, which is normal for that region in the first half of a Monday trading day.
The Friday pullback appears to be the result of several concurrent events, with Monday being a bank and US Treasury (UST) market holiday as one of several factors. For us to write about trade talks with China, the US government shutdown, or anything else political is not "what we do." US credit was materially wider on Friday due to three main factors: first, the equity market pullback; second, ETF credit outflows; and third, continued stories about "credit cracks."
We have written often about how lower equity prices, credit fund outflows, a high degree of financial leverage at the issuer level, and tight valuations are all ingredients for material credit spread widening, as identified in our daily credit trading indicators. Friday was just one example of this actual trading dynamic. The impact on all trading indicators is shown below. The single largest indicator change is the UST 5Y indicator as a short.
Earnings and US "Credit Cracks"
With PepsiCo (PEP A1/A, attractive short credit/attractive long equity) and Delta Airlines (DAL Baa2/BBB, attractive long both credit and equity) having reported results last week, this week brings 23 US G-255 issuers reporting results over a four-day period, with five of those issuers reporting before US equities open on Tuesday. Please see the attached earnings digest for October 13, 2025, for all G-255 expected results this week. This will be the only week during earnings season when only US issuers report, and it will provide significant answers to the "credit cracks" frequently mentioned by US financial news networks over the past two weeks.
Our initial focus will be on non-G-255 issuer Synchrony Financial (SYF), which reports results on Wednesday morning, followed by American Express (AXP, attractive short credit/attractive long equity) and Ally Financial (ALLY, attractive long both credit and equity), which report on Friday. If there are true credit cracks in the US economy, we will learn about them this week.
American Express (AXP): AXP 5.667 04/25/36 was unchanged (+77/10Y) and one of the best-performing financials on Friday.
Ally Financial (ALLY): ALLY 5.548 was +7bp wider (176/7Y) on Friday and slightly underperformed BBB financials.
French Banks
Last week, we noted that the French government has been reformed in the hope that an agreement can be reached by year-end. Again, our role is not to offer opinions. The FRTR 3½ '35 is +32bp from its 52-week midpoint and +7bp higher over the past three months. If there is a "crisis" over the French government budget, it is not apparent in the sovereign's Treasury curve.
BNP Paribas (Baa1/A-, attractive long both credit and equity): The longest-dated Senior Non-Preferred BNP 5.738 02/20/35, issued as an 11nc10 USD bond, traded +89/10Y on Friday. This is +10bp from its 52-week tight spread on September 22.
Crédit Agricole (A3/A- attractive long both credit and equity): ACAFP 4.818 9/25/33, issued as a 6nc5, traded +9bp from its issue spread on September 18. Our trading model indicates the ACAFP bond as attractive. However, the issuer reports results on October 30.
Trading Model Output
For US credit spreads to widen significantly, retail credit fund outflows and declining US equity prices would be required. We did see US equity prices weaken and credit fund outflow Friday. The model reacts to market conditions, buying volatility, and the key question is how Q3 earnings and outlooks will impact equity prices.
Credit Market Model Indicators
Both US Investment Grade and High Yield systematic trading indictors show USD credit now modestly overvalued. Similarly, underlying equity value of 240 of the world's 255 largest issuers of corporate debt remain overvalued even after Friday trading.
Trading Model Indicators and Strategy for Monday
Corporate bond flows for the week ending October 8 were rose when compared with the week ended October 1. After Friday's trading and credit fund outflow, the stochastic model continues to view US credit valuations as slightly overvalued, identifying long opportunities in deleveraging new supply.
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. Single A TMT (USD/EUR)
U.K. Banks (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.
Material Economic Indicators
None on Friday
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -25 % 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: +6% above average.
G-255 Issuers: 13 of the top 25 traded bonds accounted for 48% of top 25 issuer volume and 50% of total TRACE volume.
Friday Credit Market Movement
U.S. CDX Index: +2.7 bp at 50.8 bp.
U.S. IG Cash Spreads: were (+4 to +11bp) wider with Autos underperforming.
CDX HY Index: fell -.7 @106.75 (per Bloomberg).
HY Cash Bonds: Were wider led by BB Energy.
High-Yield Activity
• Dealers sold $400mm of high yield bonds on Friday.
Most Bought HY Bonds: American Axle (AXL B3/B+)
Most Sold HY Bonds: Venture Global CALC (VENTGL Ba1/BBB-)
Investment Grade Activity
Dealers sold $1 bil of IG bonds on Friday.
Most Bought Sector: Big 6 Banks
Bank of America (BAC A1/A- attractive short)
Wells Fargo (A2/BBB+ attractive short)
Most Sold Sector: BBB TMT
T-Mobil (TMUS Baa1/BBB+ attractive long)
Verizon (VZ 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 170 undervalued bonds ($258 billion market value), with 46 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,417 bonds ($2.23 trillion) are overvalued per the stochastic credit trading model, with 522 short trade indicators.
U.S. Big 6 Banks (all Ratings): 298 bonds ($744 billion) overvalued, with 75 short indicators.
Single A and BB Energy: 97 bonds ($145.7 billion) overvalued, with 58 short indicators.
Single A Healthcare: 99 bonds ($148.3 billion) overvalued, with 49 short indicators.
Single A Industrials: 95 bonds ($104.1 billion) overvalued, with 33 short indicators.
G-255 Issuer News
Warner Bros. Discovery Inc (WBD Ba3/BB attractive long both credit and equity) . has rebuffed Paramount (PARA Baa3/ BB+ attractive short credit/attractive long equity) Skydance Corp.'s initial takeover approach for being too low, according to Bloomberg . Paramount has several options to acquire Warner Bros. Discovery, including boosting its bid, going directly to shareholders, or finding additional backing through a financial partner.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 26% 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: -7 bp YoY and -54 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 identical directions for the 15th trading day in 22, as US equity prices fell and credit spreads widened materially Friday. 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 G – 255 supply on Friday and just 3 of world's largest issuers have sold 9 bonds totaling $7.7 billion of new bonds so far in October. Only $4 billion on G – 255 bonds were redeemed last week, bringing the total to $22 billion for October.
Last week saw $9 billion of inflow into US IG and HY bond fund and ETFs. That is 28.5% more than in the week ended October 1.
Last week was the strongest week in 5 for inflow to US credit funds.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 522, -401 from Friday +42% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 47, +12 from Friday.
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 65% long position threshold is reached.
Current Status: Do add new supply trades where issuer is de-levering; add new issue bonds where spreads widened by +3.5 basis points.
Current Status of trading indicators below:
Last week 1 long trade and 1 short trade reached their avoid trading level and was replaced by 1 new secondary long trade indicator.
Systematic Credit Trading Strategy October 13, 2025
Closed Positions: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level last week. The General Motors (Baa2/BBB) GM 5.45 09/06/34 reached its avoid trading level on Friday.
Enter New Longs: Las week the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread. The Broadcom (A3/A-) AVGO 4.8 2/15/36 trading +5bp to new issue spread was the new issue trade indicator added on Friday.
3. Enter New Short trades: 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 65% 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. Friday'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 Friday: General Motors (Baa2/BBB) GM 5.45 09/06/34 reached its avoid trading level on Friday. BP (A2/A-). BPLN 3.06 06/17/41 was quoted @ its avoid trading level on Friday, but did not trade. The Broadcom (A3/A-) AVGO 4.8 2/15/36 trading +5bp to new issue spread was the new issue trade indicator added on Friday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 13, 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 widened by +5.5 bp.
Remaining Shorts: 9 tightened by -6.5 bp.
Average Spread Movement: ±6.64 bp in the indicated direction.
Success Rate: 86% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20.1 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.