Systematic Credit and Equity G-255 Trading Indicators for October 2, 2025
Good Morning! No data, no problem! Buy, buy, buy.
We saw credit spreads inch tighter and equities rally on Wednesday, as the prospect of lower Q4 earnings in most sectors, owing to lower interest rates, the U.S. government shutdown, and some tariff announcements/negotiations, leaves me scratching my head. Nike revenue is trending lower for at least the next couple of quarters. We noted yesterday that, as a DJIA member, NKE equity traded at 41x forward 12-month earnings. That was yesterday. This morning, it trades at 44.2x forward earnings.
Yesterday, Pfizer (PFE) cut a deal with the U.S. government to lower "certain" drug prices to non-U.S. levels to escape three years of U.S. trade tariffs. The details of the transaction are scant at this point, but PFE equity trades at 8.5x forward earnings and has a 6.32% dividend yield.
The earnings outlooks for both issuers are "poor" with little chance of improvement. Astonishingly, however, the equity markets are willing to pay 30x cash flow for Nike ($110 billion equity market cap) and 10x Pfizer cash flow ($155 billion equity market cap). The historic saying is that "the market is never wrong," and that may be true. However, the market is not always right. I am not going to comment on the overall global growth rate for pharmaceuticals compared to sneakers and T-shirts. Our trading model is quantitative, not prospective. However, in light of yesterday's headlines, we ran the entire trading model twice to ensure the indicators were accurate. Much to our surprise, they were, which makes yesterday's market activity even more confusing.
The correlation between U.S. equity price direction and USD credit spreads is a 34-year tested metric that has never varied by more than +/- 550bp from 80%. However, that statistical correlation is being tested in 2025.
There are three reasons for the breakdown:
(1) The composition of the S&P 500 has changed radically in the past three years, with TMT (Technology, Media, and Telecom communications) representing 35% of the S&P 500 in 2022 and 44% of the SPX in 2025. Healthcare represented 15% of the S&P in 2022, and Financials represented 13%. Today, Financials still represent 13% of the SPX, while Healthcare accounts for 9%. Corporate debt indices have not changed as much. Financials still represent 25–40% of most corporate debt indices, while TMT has remained stable at 13–15%.
(2) The composition of inflows to investment funds and daily trading has changed over the past three years. The percentage of flow into general equity index funds, "Aggregate Bond," and "Corporate Bond" funds has doubled. The growth of specific equity sector and specific investment-grade/non-investment-grade bond funds has also increased, but not at the pace of general funds with wider mandates.
(3) As example Nike equity is part of the Dow Jones Industrial Average, while Pfizer is not. Nike is not one of the world's largest issuers of corporate debt; PFE is. Nike's cash flow is falling by almost 20% year-over-year, while Pfizer's cash flow is up 80% YoY in the first two quarters of 2025. Pfizer equity is up +2.7% in 2025, while Nike equity is down -1.5%.
PFE '33 bonds are -14bp tighter in 2025, and NKE '30 bonds are 8bp tighter in 2025.
What's my point?
Five-year and shorter U.S. investment-grade (IG) credit spreads are at or near all-time tight levels. At the same time, PFE dividends (which have grown every year for the past 15) are being discounted at a completely different rate than the market views consumer stocks with no growth and corporate bonds that trade within 50bp over the relevant U.S. Treasury.
How large a premium does PFE's equity yield trade when compared to its 5-year bond YTM? +215bp. It's supposed to trade at a 200bp premium.
Corporate Credit Spreads – where do they go?
(1) The U.S. risk markets are making the largest bet on U.S. Treasury rates (not the Fed Funds rate) falling by over 60bp in the next six months that I have ever seen in my 40+ years in this business. Hence the re-check of the model output last night.
(2) For corporate credit spreads to tighten significantly from present levels, the equity markets will need to not only continue trading at very high valuations but also trade at even higher valuations going forward (i.e., PE/earnings growth rate).
(3) The markets are never wrong, but they are not always right.
Impact of Government Shutdown
As it relates to Wednesday's trading – None.
Credit Market Model Indicators
The trading model hit a 2025 peak for net short credit last Tuesday, with credit spreads widening by ~4.5 basis points (bp) since then. Longer-dated credit spreads remain wider than the five-year tight levels seen in November 2024. New supply from deleveraging issuers is the only attractive long trade opportunity.
Key Economic information Wednesday
U.S. Rail carloads for the week ending September 27 were 228,903 + 0.9% compared with the same week in 2024, while U.S. weekly intermodal volume was 283,739 containers and trailers, + 1.1% compared to 2024.
For the first 39 weeks of 2025, U.S. railroads reported cumulative volume of 8,652,275 carloads, + 2.1% YoY
Private-sector payrolls decreased by 32,000 after a revised 3,000 decline a month earlier, according to ADP Research data.
ADP periodically recalibrates their figures based on an expansive series from the Bureau of Labor Statistics, and the adjustment resulted in a reduction of 43,000 jobs in September compared to pre-benchmarked data.
Trading Model Indicators and Strategy for Thursday
With ETF corporate bond flows accelerating in the week ended October 1, 2025 there is no impetus to force credit spreads wider. Our trading model sees valuations as overvalued and only sees long trade opportunities in new de-levering supply trading +2 bp or more behind new issue spread.
Top 3 Short-Indicated Sectors
BBB Autos (USD/EUR)
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 re-leveraging sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 169 long/short trades in 2025 (marked via TRACE), 87% achieved ±5 bp targets, averaging ±6.90 bp per trade.
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 U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -9% below average.
G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 96% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
Volume: 22% above average.
G-255 Issuers: 15 of the top 25 traded bonds accounted for 54% of top 25 issuer volume and 61% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: +.3 bp at 47.70 bp.
U.S. IG Cash Spreads: were unchanged to (+2bp) wider with US Financials underperforming.
CDX HY Index: unchanged +.2 107.9 (per Bloomberg).
HY Cash Bonds: Were unchanged.
High-Yield Activity
• Dealers bought $ 100 million of HY bonds on Wednesday.
Most Bought HY Bonds: CCO Holdings (B1/BB- attractive long)
Most Sold HY Bonds: Civitas Resources (CIVI B1/BB-)
Investment Grade Activity
Dealers sold $600mm of IG bonds on Wednesday.
Most Bought Sector: Single A TMT
Broadcom (AVGO A3/A- attractive long)
Apple (AAPL Aaa/AA+ attractive long)
Most Sold Sector: Single A Healthcare
Bank of America (BAC A1/A attractive short)
Morgan Stanley (MS A1/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: The stochastic credit trading model identifies 100 undervalued bonds ($170.7 billion), with 28 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,533 bonds ($2.38 trillion) are overvalued per the stochastic credit trading model, with 1035 short trade indicators.
U.S. Big 6 Banks (All Ratings): 306 bonds ($762 billion) overvalued, with 216 short indicators.
Single A and BB Energy: 103 bonds ($163.7 billion) overvalued, with 65 short indicators.
Single A Healthcare: 99 bonds ($138.3 billion) overvalued, with 81 short indicators.
Single A Industrials: 101 bonds ($110.7 billion) overvalued, with 78 short indicators.
G-255 Issuer News
Auto companies are making the $7,500 discount available for leased vehicles that are in transit or on dealer lots, with Hyundai also lowering the price of the 2026 Ioniq 5 model by as much as $9,800. EV sales are expected to slow in coming quarters, with Ford Chief Executive Officer Jim Farley saying the EV market will be "way smaller than we thought" and predicting EV sales in the US could go down to 5% from about 10% now.
Tesla, Ford (F Ba1/BBB- attractive short credit and equity), Chevrolet (GM Baa2/BBB attractive short credit and equity), BMW (A2/A- attractive long credit and attractive short equity) and Hyundai (HYNMTR A3/A- attractive long credit, attractive short equity) have the most popular Electric Vehicles in the US.
TotalEnergies SE is poised to form a joint venture to develop electric-vehicle charging stations in France with state-controlled financial institution Caisse des Depots et Consignations to fund an expansion of the business.
TTE FP would put its charging points located in urban areas across France into the venture, while Banque des Territoires — a unit of Caisse des Depots — would provide funds to develop the network owned roughly 50% by each entity. Total Energies (TTEFP Aa3/A+) has attractive short credit and equity indicators.
Delta Air Lines Inc. expects most US airlines to lose money, as spending diverges according to income groups, the carrier's chief executive officer said. Expensive premium seats and a resurgence in business travel will allow Delta and rival United Airlines Holdings Inc. to make the majority of the profit in the industry, Ed Bastian, Delta's CEO said. Delta Airlines (DAL Baa2/BBB) and United (UAL Ba1/BB-) both carry attractive long equity and credit trade indicators.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 35% 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.
Note: Bloomberg 10 year credit spreads are determined by the Moody's Baa 10Y credit index yield less UST 10Y yield. Hence, the large change at the end of the quarter.
2025 10-Year Credit Spreads
Year-over-Year (YoY): Wider compared to last year.
Year-to-Date (YTD): Wider YTD.
UST 10-Year Rates: Up +32 bp YoY but down -47 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities and credit markets failed to correlate directionally for the fifth trading day in 15. There are several explanations for this phenomena explained on Page 1. Equities edged higher, while corporate credit was unchanged. Historically, equities tend to rally post US Government -shutdown. The 2025 correlation between 10-year U.S. corporate credit and equity prices is 74%, the fifth lowest on record.
New USD G-255 supply and fund flow data
No new G-255 issuers sold USD debt on Wednesday with the US Securities and Exchange Commission closed. Westpac (WSTP) sold 5Y covered Floating Rate Notes is GBP and Danaher (DHR) sold 5 tranches of Swiss Franc debt Wednesday.
High-yield ETFs swung by $1.68b to $1.57b
Corporate bond ETFs expanded by $2.51b to $3.2b
Dedicated Corporate IG ETF inflows dropped 38% to just over $400mm,
Dedicated HY inflows went from -$300mm outflow to $1.4 bil inflow.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1034, +1 from Wednesday +98% above the 200 day moving average of all model short trading recommendations.
Attractive long indicators: 28, +5 from Wednesday.
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: No recent deleveraging new supply trades; new issue 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 2, 2025
Closed Positions: Last week the trading model indicators closed on short trade.
Enter New Longs: On Wednesday Lowe's (Baa1/BBB+) LOW 4 1/2 10/15/32 was added as a long trade +3 bp to new issue spread.
3. Enter New Short trades: Last night the trading model strongest 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 59%
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 Wednesday: Lowe's (Baa1/BBB+) LOW 4 1/2 10/15/32 was added as a long trade indicator.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 1, 2025)
Performance Summary: Total Trades: 169 (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: 13 widened by +.12 bp.
Remaining Shorts: 9 tightened by -11 bp.
Average Spread Movement: ±6.89 bp in the recommended direction.
Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (19.9 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.