Systematic Credit and Equity G-255 Trading Indicators for September 26, 2025
Good Morning! Risk indicators weakened slightly on Thursday as the world's 255 largest issuers of corporate debt paused after issuing over $30 billion in the first three days of the week. The $18 billion, six-part Oracle (ORCL Baa2/BBB) deal on Wednesday reflects month- and quarter-end positioning by U.S. broker-dealer desks and corporate bond fund managers known for "index hugging," as ORCL and BBB TMT weightings will shift next Wednesday.
With a potential U.S. government shutdown looming next week, larger new USD deals may face challenges. We expect a slowdown in new supply in October compared to September's pace. During the last government shutdown (December 2018–January 2019), the S&P 500 gained 10.3% over 35 days, while bonds remained largely unaffected. Post-shutdown, U.S. risk markets rallied significantly.
Credit Market Model Indicators:
Our trading model hit a 2025 peak for net short credit on Tuesday, with credit spreads widening by approximately 3 basis points (bp) since. Longer-dated credit spreads remain wider than last year's five-year tight levels due to:
Significant long-term new supply.
A flattening UST yield curve.
Global corporate issuers adding balance sheet debt for equity repurchasing.
With Q3 earnings season three weeks away, U.S. banks—considered the most overvalued sector in our trading universe—report results in under 30 days. Given potential balance sheet changes from securities holdings, our systematic trading model avoids adding risk to issuer positions within 30 days of earnings reports.
Since last Friday, the model's credit indicator signaled spreads widening by +5 to +10 bp over the next 5–10 trading days. Current calculations show spreads are +4 bp wider since then.
UST: Not yet overvalued. It appears outflows are picking up.
Lipper reported the largest inflow into UST funds in five months last week, absorbed by 2Y, 5Y, and 7Y auctions this week. Despite talk of a "steepening" UST curve, syndicate desks' attempts to reflect this in new corporate bond issue pricing are not evident. The UST 5–7 year complex is gaining traction.
Change 1 Week 1 Month 3 Month YTD YoY
UST 2Y +5.0bp -2.6bp -6.6bp -58.8bp +2.5%
UST 5Y +6.2bp +2.2bp -3.2bp -61.9bp +19.4bp
UST 10Y +3.1bp -8.4bp -6.2bp -39.0bp +38.bp
UST 30Y +.2bp -15.5bp -3.5bp -1.7bp +63.4bp
The U.S. Fed Funds rate is now 125 bp lower year-over-year. Rate cuts have not yet materially impacted corporate funding based on the UST curve, keeping our trading model in "unattractive" mode for re-levering new issues.
Key Economic information Thursday
-U.S. GDP: Grew at a revised 3.8% annualized pace in Q2.
-Business Investment: Expanded at a 5.7% pace.
-Consumer Spending: Advanced at a 1.6% annualized rate.
-Core PCE Price Index: Accelerated to 2.6% in Q2 from 2.5%.
Initial Jobless Claims: Fell by 3,000 year-over-year for the week ending September 19, suggesting a 4.3–4.4% unemployment rate for September.
Trading Model Indicators and Strategy for Friday
Our systematic trading model indicates USD high-yield (HY) and investment-grade (IG) credit as overvalued. Inflows into non-USD funds are growing, though at a slower pace. Post-Thursday trading, 7-year credit remains the most attractive maturity sector.
Today's Systematic Trading Sector Indicators
Top 3 Short-Indicated Sectors:
Big 6 Senior Bank Holdco (USD only)
USD Single A Healthcare (USD only)
Single A Industrials (all currencies)
Top 3 Long-Indicated Sectors:
U.S. Regional Banks (USD)
U.S. BBB/BB TMT (USD and EUR)
U.K. Banks (all currencies)
USD Systematic Trading Model
This morning's model indicators continue to suggest U.S. credit is overvalued, with the most likely trading scenario being wider spreads over the next 6 trading days.
Trading Allocation Strategy
42% Long: Undervalued, deleveraging bonds.
38% Short: Overvalued bonds in re-leveraging sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 167 long/short trades in 2025 (marked via TRACE), 89% achieved ±5 bp targets, averaging ±6.95 bp per trade.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, as global regulatory requirements for reported material events could impact trading without notice.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: +31% above average.
G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
Volume: 31% above average.
G-255 Issuers: 14 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 57% of total TRACE volume.
Thursday Credit Market Movement
U.S. CDX Index: +0.80 bp at 48.55 bp.
U.S. IG Cash Spreads: (+2bp) wider with Utilities and Financial Perps underperforming a second day.
CDX HY Index: -.2bp @ 107.6 (per Bloomberg).
HY Cash Bonds: Were wider with BB TMT and BB Healthcare underperforming.
High-Yield Activity
• Dealers bought $ 600mm of HY bonds on Thursday.
Most Bought HY Bonds: Venture Global (VENLNG B1/BB)
Most Sold HY Bonds: Windstream Services (UNIT B2/B)
Investment Grade Activity
Dealers sold $100mm of IG bonds on Thursday.
Most Bought Sector: Single A Healthcare
AbbVie (ABBV, A3/A- attractive short)
Pfizer (PFE A3/A- attractive long)
Most Sold Sector: BBB TMT
Oracle (ORCL Baa2/BBB attractive short)
INTEL (INTC Baa2/BBB 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: The stochastic credit trading model identifies 103 undervalued bonds ($167 billion), with 29
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,554 bonds ($2.4 trillion) are overvalued per the stochastic credit trading model, with 951 short trade indicators.
U.S. Big 6 Banks (All Ratings): 300 bonds ($750.6 billion) overvalued, with 195 short indicators.
Single A and BB Energy: 104 bonds ($173.3 billion) overvalued, with 67 short indicators.
Single A Healthcare: 115 bonds ($166.5 billion) overvalued, with 64 short indicators.
Single A Industrials: 110 bonds ($123.1 billion) overvalued, with 49 short indicators.
G-255 Issuer News
The Spanish securities regulator CNMV has given green light for the raised $20 billion offer that BBVA SA has made for rival Banco Sabadell SA's shareholders, paving the way for investors to make their decision. BBVA is now offering one ordinary BBVA share for every 4.8376 ordinary shares of Banco Sabadell. That valued the bank at about €17 billion ($20 billion), a premium of around 3% to Sabadell's market value
BBVA (BBVASM Baa2/A-) credit has a short trading indicator. BBVA SM equity has a long trade indicator.
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.
Credit Trading Model Valuation
The systematic credit trading indicator (Investment Grade and High Yield) shows overvaluation. A record 140 of the world's 255 largest corporate debt issuers, the highest in the 34-year history of the trading model, are increasing leverage on their balance sheets.
2025 10-Year Credit Spreads
Year-over-Year (YoY): 10-year credit spreads are slightly wider compared to last year.
Year-to-Date (YTD): Spreads are wider YTD.
UST 10-Year Rates: Up +38 basis points (bp) YoY but down -39.5 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities correlated directionally with U.S. equity price movements for the 10th trading day in the last 12. We are now in a quiet period for earnings reports, and we appear headed for a US Government shutdown. Historically, U.S. equities rally after the shutdown ends. U.S. corporate debt valuations are no longer at all- time tights. USD 10-year credit and equity prices have correlated on 146 out of 196 trading days, well below the historical norm over the past 33 year. There is an 80% historical correlation between U.S. equity prices and 10-year U.S. corporate credit spreads.
New USD G-255 supply and fund flow data
No new G – 255 new supply on Thursday. We do expect more supply next week.
US fund flows for the week ended Sept. 24, compared to a week earlier, according to LSEG Lipper.
Short and intermediate investment-grade bonds: $1.83b inflow vs. $1.86 inflow
High-yield notes: $365.3m outflow vs $938.5m inflow
Treasuries: $7.89b inflow vs. $1.8b inflow
US leveraged loans: $162.4m inflow vs. $125.2m inflow
Mortgage-related: $205.6 inflow vs. $125.9m inflow
Overall US IG corporate bond inflows for ETF + mutual funds were $2.7 billion this week – roughly $600mm lower.
Overall US HY corporate bond outflows were $350mm this week – roughly $1.44 billion lower.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 951, -128 from Thursday +95% above the 200 day moving average of all model short trading recommendations.
Attractive long indicators: 29 -4 from Thursday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 5-year maturities.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.
Replace Longs: Replace long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 67% long position hurdle is reached.
Current Status of trading indicators below:
This 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 September 26, 2025
Closed Positions: On Thursday trading indicator for Honeywell (A2/A) HON 4 ½ 1/15/34 reached its reached its avoid trading level .
Enter New Longs: On Monday the trading model indicator for new issue Broadcom AVGO 4.8 02/15/36 and on Tuesday new issue Lowe's (Baa1/BBB+) LOW 4 ½ 10/13/32 indicators were added to the long/short basket trade. Trading model indicators now show new issue as unattractive at current trading levels.
3. Enter New Short trades: On Monday the trading model indicator added the General Motors GM 5.45 09/06/34 on Tuesday United Healthcare (Baa2/BBB) UNH 3.05 05/15/41 and on Thursday the s added to the John Deere Credit (A1/A) DE 5.45 01/16/35 to the long/short model basket trade. 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 70% 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 64.3%
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 Thursday: None
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 25, 2025)
Total Trades: 167 (1% of total trades).
Performance Summary:
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: 13 widened by +.54 bp.
Remaining Shorts: 8 tightened by -11.6 bp.
Average Spread Movement: ±6.94 bp in the recommended direction.
Success Rate: 89% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (19.8 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.