Systematic Credit and Equity G-255 Trading Indicators for October 17, 2025
Good Morning! The U.S. capital markets moved decidedly lower on Thursday as Zions Bancorp (ZION) and Western Alliance Bancorp (WAL) shares fell more than 10% after both announced large write-downs related to two borrowers under related commercial and industrial loans. Western Alliance filed a lawsuit in August alleging fraud by a borrower for failing to provide collateral loans in the first position. ZION is taking a $50 million charge, while Western Alliance evaluated existing collateral and believes it covers the obligation based on "as-is" appraisals.
We are not going to provide a line-by-line analysis, but given the size of Zions' loan book (just under $61 billion), a $50 million charge is outsized.
US Bank Earnings:
Eleven of the 17 G-255 U.S. banks have reported 3Q results. While some income statements show record results, balance sheet leverage at the U.S.' largest banks continues to grow, and CET capital does not.
While balance sheets at the U.S.' largest banks are growing, loan books are not. Of the 11 bank reports, seven showed improving credit quality.
Synchrony Financial (SYF), not a G-255 issuer, reported results that not only beat expectations but also showed significant improvement in balance sheet credit quality on both a QoQ and YoY basis. The company also increased its share buybacks.
Conclusions from Thursday's Results and Trading:
1. U.S. banks will continue to add financial leverage to their balance sheets and increase their holdings of marketable securities financed by debt.
2. Large-cap U.S. regional banks were the most purchased investment-grade bonds on Thursday.
3. Bank of America (BAC), Goldman Sachs (GS), and Charles Schwab (SCHW) have distinguished themselves in terms of capital management. They are not likely to buy back equity if the current price is close to its all-time high. Similarly, they will not expand their balance sheets in terms of trading securities or holdings unless they see a market opportunity.
Conclusion: Citigroup (C), PNC Financial Services Group (PNC), Bank of New York Mellon (BK), U.S. Bancorp (USB), Charles Schwab (SCHW), and KeyCorp (KEY) are all attractive long credit indicators among the 11 banks that have reported. PNC, Wells Fargo (WFC), KeyCorp (KEY), and Marsh & McLennan (MMC) are the only three attractive long equity indicators at current prices.
Tariff Impact
US trade tariffs are materially impacting US transportation 3Q operating earnings.
Earnings Reports Thursday:
Having heard from G-255 issuer CSX last night, we expect to hear from Truist Financial (TFC), Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), American Express (AXP), State Street Corp (STT), and Ally Financial (ALLY) this morning. After 19 G-255 issuer reports, we have seen one additional issuer adding financial leverage, bringing the total to 141.
Trading Model Output:
Credit trading indicators fell to 38% above average for short trade indicators and 50% below average for long trade indicators. Flows into credit ETFs and mutual funds fell by 50% in the week ended October 15.
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 even after Thursday's trading.
Trading Model Indicators and Strategy for Thursday:
ETF and mutual fund corporate bond flows for the week ending October 15 rose only slightly compared to the week ending October 8. High-yield bonds experienced outflows. After Thursday's trading, the stochastic model continues to view U.S. credit valuations as overvalued, identifying long opportunities in deleveraging new supply and deleveraging new supply trading behind new issue spreads.
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. 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 Thursday:
Philadelphi Fed Index Manufacturing Index for October fell to -12.8 from 23.2 in September.
Prices Paid rose to 49.2 v. 46.8 in September
Prices Received rose to 26.8 v. 18.8.
New order rose to 18.2 from 12.4.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -16 % below average.
G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
Volume: +10% above average.
G-255 Issuers: 14 of the top 25 traded bonds accounted for 47% of top 25 issuer volume and 50% of total TRACE volume.
Thursday Credit Market Movement
U.S. CDX Index: +2 bp at 50.5 bp.
U.S. IG Cash Spreads: were (+2 to +3bp) wider Energy and Financial underperforming.
CDX HY Index: fell -.8 @106.85 (per Bloomberg).
HY Cash Bonds: Were wider led led by energy and financials.
High-Yield Activity
• Dealers sold $100mm of high yield bonds on Thursday.
Most Bought HY Bonds: Altice (SFRFP Caa1/CCC+)
Most Sold HY Bonds: Venture Global (VNLNG B1/BB)
Investment Grade Activity
Dealers bought $1.1 billion of IG bonds on Thursday.
Most Bought Sector: Regional Banks
Synchrony Financial (SYF /BBB-)
PNC Bank (PNC A2/A- attractive long)
Most Sold Sector: BBB rated TMT
ATT (T Baa2/BBB attractive long)
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 151 undervalued bonds ($228 billion market value), with 55 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,480 bonds ($2.3 trillion) are overvalued per the stochastic credit trading model, with 696 short trade indicators.
U.S. Big 6 Banks (all Ratings): 297 bonds ($736 billion) overvalued, with 93 short indicators.
Single A and BB Energy: 94 bonds ($141 billion) overvalued, with 51 short indicators.
Single A Healthcare: 114 bonds ($166.6 billion) overvalued, with 74 short indicators.
Single A Industrials: 96 bonds ($105.1 billion) overvalued, with 53 short indicators.
G-255 Issuer News
None overnight
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 28% of the widening observed from November 12, 2024, to April 10, 2025.
Model Valuation: IG and HY markets show overvaluation. Post earnings announcements from 19 of the world's 255 largest issuers of corporate debt record 141 are increasing leverage.
2025 10-Year Credit Spreads
Year-over-Year (YoY): are wider compared to last year.
Year-to-Date (YTD): are wider YTD.
UST 10-Year Rates: -14 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 correlated for the first time in four days and only the 16th trading day in the last 25, as U.S. equity prices fell and U.S. credit spreads widened on Thursday. The historical 80% directional correlation between U.S. equity prices and U.S. high-yield (HY) and investment-grade (IG) credit spreads has weakened in 2025 due to changes in sector weightings in U.S. equity and bond indices, as well as the inclusion of non-U.S. (Yankee) issuers in bond indices. Corporate credit continues to tighten despite the U.S. government shutdown, supported by limited new supply. Historically, U.S. equities typically rally following government shutdowns.
New USD G-255 supply and fund flow data
Net inflows to ETFs totaled $9.19 billion in the week ended October 14, 2025, including the effect of leveraged funds, compared with $14.5 billion the previous week.
Corporate bond ETFs dropped by $2.3 billion to $979.2 million.
Investment-grade ETFs dropped by $1.43 billion to $7.23 billion, and high-yield ETFs saw outflows of $532.1 million, a swing of $2.18 billion.
Mutual Fund Flows for the Week Ended October 15:
Short- and intermediate-term investment-grade bonds: $2.24 billion inflow vs. $3.34 billion inflow.
High-yield notes: $1.3 billion outflow vs. $2.07 billion inflow.
Treasuries: $3.66 billion inflow vs. $3.51 billion inflow.
U.S. leveraged loans: $1.3 billion outflow vs. $590.8 million inflow.
Mortgage-related: $160.5 million inflow vs. $861.3 million inflow.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 696, -113 from Thursday +39% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 56, +9 from Thursday.
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 +2 basis points.
Current Status of trading indicators below:
This week 1 long trade and 1 short trade reached their avoid trading level.
Systematic Credit Trading Strategy October 17, 2025
Closed Positions: Broadcom (A3/A-) AVGO 4.8 02/15/36 added +5 bp behind new issue spread reached its reached its avoid trading level on Wednesday
Enter New Longs: Last week the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread. 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. Thursday'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 Thursday: None
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 16, 2025)
Performance Summary: Total Trades: 172 (1% of total trades).
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.