Systematic Credit and Equity G-255 Trading Indicators for October 21, 2025
Good Morning! Markets are about to shift focus from financials to industrials—or are they? With the SEC still shuttered, nearly all of the new U.S. corporate bond supply—$28 billion—has been provided by six U.S. banks. Seventeen of the largest 18 U.S. banks have reported third-quarter earnings, and based on those reports, it's clear that the largest U.S. companies (primarily banks) will continue to use the corporate bond market to maintain a constant bid for their equity, even at all-time high prices.
Returns to shareholders
Cynics might call this a "creeping LBO" or the use of public markets to make equity appreciation the largest component of management compensation. However, our quantitative trading model suggests otherwise.
While Warren Buffett (Berkshire Hathaway, which doesn't pay a dividend and didn't repurchase equity in Q2 2025) and Benjamin Graham and David Dodd (I wonder if I'm the only one in the business left who has read their work) might differ on their views of the re-leveraging of global corporations, Graham and Dodd would likely argue that dividend payouts and the more tax-efficient, market-supportive share repurchasing are exactly how corporate cash flow should be managed. Buffett's take is that if his management can't achieve a higher return on capital than repurchasing public market equity through their investment operations, then Berkshire's management isn't performing as well as it could.
Increasing financial leverage on the world's largest Corporate Balance Sheets
However, both Graham and Dodd and Buffett would argue that using the public bond market to reward shareholders increases risk and reduces long-term returns.
For now, most of the world's largest corporations are pursuing the re-leveraging route. Since only one sector's participants have fully reported Q3 results, we use the reported results of the six largest banks to illustrate.
Dividend and Share repurchase growth vs. Earnings growth.
As shown, overall revenue for the six largest U.S. banks rose 11.2% ($15.3 billion) year-over-year in Q3 2025, while share repurchasing and dividend payment growth surged 37%, or nearly $10 billion, year-over-year. That's an astonishing figure compared to the banks' 18% year-over-year Q3 earnings growth. The banks spent 160% of their Q3 earnings growth on dividends and repurchasing.
Financial leverage on non-bank balance sheets continues to rise, though at a slower pace than in Q2 2025. Dividends and share repurchasing are growing far faster than reported revenue.
Today, we hear from 11 of the G-255 issuers, with only one, Capital One (COF), reporting Q3 results this evening as a financial issuer. We will gain more insight into the re-leveraging of corporate balance sheets after today's earnings results. Our stochastic trading model generates indicators for both the equity and debt sides of all 255 issuers' financial statements.
Trading Model Output:
Credit trading indicators are 32% above average for short trade indicators and 47% below average for long trade indicators on Monday. 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
Trading Model Indicators and Strategy for Tuesday:
After Monday's trading, the stochastic model continues to identify long opportunities in deleveraging new supply and deleveraging new supply trading behind new issue spreads.
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 Monday:
We will see 42 of the world's largest 255 issuers of corporate debt report results this week. Only 7 of those reports will come from banks.
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -21 % below average.
G-255 Issuers: 92 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
Volume: +2% above average.
G-255 Issuers: 12 of the top 25 traded bonds accounted for 50% of top 25 issuer volume and 55% of total TRACE volume.
Monday Credit Market Movement
U.S. CDX Index: -1.3 bp at 48.2 bp.
U.S. IG Cash Spreads: were unchanged to (+1bp) wider US Financials underperforming.
CDX HY Index: rose +.25 @107.3 (per Bloomberg).
HY Cash Bonds: Were tighter led by BB healthcare.
High-Yield Activity
• Dealers bought $1,1 billion of high yield bonds on Monday.
Most Bought HY Bonds: Clue Opco (FWRD B2/B)
Most Sold HY Bonds: CCO Holdings (CCO B2/B attractive long)
Investment Grade Activity
Dealers bought $100mm of IG bonds on Monday.
Most Bought Sector: Yankee Banks
Canadian Imperial Bank (CM A2/A- attractive short)
HSBC Holdings (HSBC A3/1- attractive long)
Most Sold Sector: US Banks
Goldman Sachs (GS A2/BBB+ attractive short)
American Express (AXP A2/A- 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 156 undervalued bonds ($227.8 billion market value), with 60 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,424 bonds ($2.22 trillion) are overvalued per the stochastic credit trading model, with 664 short trade indicators.
U.S. Big 6 Banks (all Ratings): 305 bonds ($761.7 billion) overvalued, with 103 short indicators.
Single A and BB Energy: 94 bonds ($139.8 billion) overvalued, with 46 short indicators.
Single A Healthcare: 114 bonds ($166.5 billion) overvalued, with 69 short indicators.
Single A Industrials: 96 bonds ($105.1 billion) overvalued, with 53 short indicators.
G-255 Issuer News
11 G -255 issuers report results today.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 34% 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 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 YTD.
UST 10-Year Rates: -23 bp YoY and -60 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 diverged again on Monday, with U.S. credit spreads mixed and U.S. equities decidedly higher. In the 33 years that our systematic trading model has operated, we have only seen three years (2008, 2012, and 2016) when 10-year U.S. credit spreads and U.S. equity prices did not move in the same direction for at least 75% of the 252 trading days in a single year.
The historical 80% directional correlation between U.S. equity prices and credit spreads has weakened significantly in 2025, driven by shifts in sector weightings within U.S. equity and bond indices and the growing presence of non-U.S. (Yankee) issuers in bond indices.
Despite the ongoing U.S. government shutdown, corporate credit spreads continue to tighten, bolstered by constrained new bond issuance. Historically, U.S. equities tend to rally following government shutdowns. However, the introduction of trade tariffs is increasingly unlikely to stimulate new demand in the U.S. corporate bond market.
New USD G-255 supply and fund flow data
State Street Corp (STT), Truist Financial (TFC), and American Express (AXP) added new bank supply post-Q3 earnings reports. However, the size ($5.5 billion over four bonds), demand (Truist dropped its 4nc3 holdco offering), and aftermarket trading were less than enthusiastic.
Seldom does State Street offer 11nc10 holdco paper. Even more rarely does a State Street new bond come to market reasonably priced. However, Monday's new 11nc10 State Street bond was priced attractively, according to our trading model indicators.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 664, +59 from Monday +31% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 54, -2 from Monday.
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 Monday: 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 20, 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.