Systematic Credit and Equity G-255 Trading Indicators for October 10, 2025
Good Morning! Earnings season is now underway, and yesterday's earnings (please see earnings digest for October 9) were full of "adjustments." Since PepsiCo (PEP) and Delta Air Lines (DAL) "adjusted earnings" beat analysts' "adjusted expectations," equities of those issuers rose, and credit spreads of those issuers outperformed the rest of the credit market.
Unadjusted Earnings
PepsiCo's unit volume growth was even more negative than 2Q, and pricing was less than +3% YoY around the globe. PepsiCo's net cash flow fell from $3.3 billion in the first 9 months of 2024 to $200 million in the first 9 months of 2025. That's an improvement from the first 6 months of this year, and the company did not use its balance sheet to raise its dividend and repurchase shares.
Delta's 3Q operating earnings rose 21% YoY, due primarily to an 11% decline in fuel costs. Main cabin revenue fell 4% YoY. Total revenue per average seat mile rose 2%. Load factor declined in every region except Latin America. Absent the 11% decline in fuel costs, "real" operating earnings rose less than 5% YoY.
So, while DAL and PEP equity had their "day in the sun," the remainder of the consumer issuers underperformed in both the credit and equity markets.
"Credit Cracks"
The bankruptcies of Automotive Credit Corp., Tricolor Auto Lending (both subprime auto lenders), and First Brands Group (secondary auto parts maker) have sent credit spreads of Ally Financial, Capital One Financial, and Santander USA materially wider in the past week post the First Brands Chapter 11 filing.
First, we note that none of the three entities that filed for bankruptcy have public equity or produce regular SEC filings.
Second, ALLY, COF, and SANUSA (all attractive long credit; COF and ALLY attractive long equity) all report within the next 30 days. As of the end of 2Q, all were deleveraging their balance sheets and showed improving credit quality.
Third, ALLY has the largest percentage exposure to consumer auto (60%), while Capital One (COF) and SANUSA have far less exposure in their overall lending books to consumer auto.
Finally, we will need to see what the DOJ investigations into Tricolor and First Brands' financing look like before we point to an industry issue.
French Banks
We don't want to make political or market-speculative commentary. French Government Bonds and Equities have rallied on news that, "et voilà ," a new French government is about to be formed. USD French bank bonds, however, continue to follow those with US auto subprime exposure, even though they have none.
Trading Model Output
The trading model is no longer within 5bp of signaling "significantly overvalued." For US credit spreads to widen significantly, retail credit fund outflows and declining US equity prices would be required. 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 as overvalued but not extended. Similarly underlying equity value of 240 of the world's 255 largest issuers of corporate debt remain overvalued but not yet at short trade indicator levels on an overall basis.
Trading Model Indicators and Strategy for Thursday
Corporate bond flows for the week ending October 8 were rose when compared with the week ended October 1. After Thursday's trading, the stochastic model continues to view US credit valuations as 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. BBB/BB TMT (USD/EUR)
U.K. Banks (all currencies)
Trading Allocation Strategy
42% Long: Undervalued, deleveraging bonds.
38% 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 Thursday
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -6% below average.
G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading
Volume: -10% below average.
G-255 Issuers: 11 of the top 25 traded bonds accounted for 52% of top 25 issuer volume and 55% of total TRACE volume.
Thursday Credit Market Movement
U.S. CDX Index: +.5 bp at 48.1 bp.
U.S. IG Cash Spreads: were (+1 to +3bp) wider with TMT underperforming.
CDX HY Index: fell -.2 @107.45 (per Bloomberg).
HY Cash Bonds: Were wider led by BB TMT.
High-Yield Activity
• Dealers sold $100mm of high yield bonds on Thursday.
Most Bought HY Bonds: Warnermedia Holdings (WBD Ba2/BB attractive long)
Most Sold HY Bonds: Celanese Holdings (CE Ba1/BB+ attractive short)
Investment Grade Activity
Dealers sold $600mm IG bonds on Thursday.
Most Bought Sector: BBB TMT
Oracle (ORCL Baa2/BBB attractive short)
Hewlett Packard Enterprises (Baa2/BBB attractive short)
Most Sold Sector: Consumer
Home Depot (HD A2/A attractive long)
Lowe's (LOW 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 107 undervalued bonds ($158 billion market value), with 35 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,514 bonds ($2.35 trillion) are overvalued per the stochastic credit trading model, with 923 short trade indicators.
U.S. Big 6 Banks (All Ratings): 303 bonds ($754.7 billion) overvalued, with 188 short indicators.
Single A and BB Energy: 103 bonds ($160.4 billion) overvalued, with 63 short indicators.
Single A Healthcare: 98 bonds ($146 billion) overvalued, with 82 short indicators.
Single A Industrials: 98 bonds ($108.1 billion) overvalued, with 55 short indicators.
G-255 Issuer News
None this morning
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 43% 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: Up +9 bp YoY but down -44 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 14th day in 21, as US equity prices fell and credit spreads widened Thursday. 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
Thursday saw a third G-255 new issue this from European Yankee Bank Cooperative Rabobank (RABOBK Aa2/A+ Sr. Pref rating). The new bonds will replace recent Sr. Non Pfd USD maturities. Rabobank reports financials every 6 months - Next report will not be until February 2026.
Short and intermediate investment-grade bond mutual funds: $3.26b inflow vs. $1.83b inflow last week
High-yield notes: $2.06b inflow vs. $1.22b inflow
Treasuries: $3.51b inflow vs. $7.71b outflow
US leveraged loans: $544.3m inflow vs. $493m inflow – all according Lipper
Broad bond-market ETFs expanded by $1.2b to $4.49b
Government bond ETFs expanded by $3.65b to $4.02b
Dedicated investment grade ETFs rose by $122mm to $644 mm
Dedicated non – investment grade ETFs rose by $105mm tp $1.602 bil
Last week was the strongest week in 5 for inflow to US credit funds.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 923, -122 from Thursday +84% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators: 35, unchanged 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 62.5% long position threshold is reached.
Current Status: Do not add to recent deleveraging new supply trades; instead add new issue bonds where 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 9, 2025
Closed Positions: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level on Tuesday
Enter New Longs: Monday the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread.
3. Enter New Short trades: Last week's 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. Thursday's Basket Trade long/ short ratio 60.8%
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 10, 2025)
Performance Summary: Total Trades: 171 (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.