Systematic Credit and Equity G-255 Trading Indicators for October 14, 2025
Good Morning! "Buy the dip" and "the trend doesn't end until the trend ends!" were the historic industry terms used to describe Monday's equity trading. With US bond markets closed on Monday, we can't add much. Our trading model provided several changes in indicators over the weekend, disclosed in Monday's report. Time to buy credit? A: Not a chance. For more details, please see yesterday's report. US equity futures trading is not promising thus far on Tuesday.
Is a "Private Credit Crisis" the true "credit crack" in the US capital markets? A: Quantitatively speaking - Yes
We have read numerous financial comments relating to the private credit market and private credit funds and the potential impact on the US financial system. Some of the commentary makes sense, some of the commentary "not so much."
Quantitatively speaking, however, some of the most recent statements by notable market professionals relating to the potential for private credit to be the "next financial crisis" are quantitatively correct according to our trading model.
The key unsolved Private Credit data issues are:
(1) The actual size of the private credit market. Is it over $3 trillion, as Morgan Stanley suggests, or is the size $1.5 - $2.1 trillion (that's a pretty wide range), as printed by Russell Investments? The fact that no firm has any ability to estimate the actual market size is alarming.
(2) Who has the largest exposure? Certainly, if no one can estimate the size of the market, overall exposures are a "true unknown." That is even more alarming.
However, the three "knowns" combined with the two "unknowns" create a trading paradigm with a very "slippery slope."
Overall Credit market data and metrics:
(1) The US mortgage market is roughly $13 trillion, US investment grade tradable debt is roughly $9.7 trillion, US non-investment grade tradable debt market is roughly $1.8 trillion, and the US leveraged loan market is roughly $1.7 trillion.
For those of you keeping score at home, that's $26.2 trillion of overall debt risk market capital before adding private loans.
(2) 63% of the overall $29 trillion is held using some type of financial leverage.
(3) A 15% retracement (.85 cents on the $) in a $3 trillion "unknown" market would clearly be enough to force reduction of risk across all asset classes.
And for those of you that weren't around in 2016, 2012, 2008, 2000–02, 1989, 1987, I apologize for dating myself. A -10% decline in private credit asset values, and statistically speaking, we are headed for a financial market spinout. Hence why this year "adjusted" finally exceeds the "crisis" in references to global financial verbiage. The question is, how long will the markets gravitate to adjusted rather than crisis?
Stochastic chances of a "Private Credit Crisis"
What were the stochastic chances of significant US capital market risk associated with private credit as of the end of Q2 2025? A: Less than 10%. That is based on the Non-Performing Asset ratio of the US' top 19 banks.
Earnings Reports Tuesday
In a couple of hours, we will hear results from Citigroup (C), JP Morgan (JPM), Goldman Sachs (GS), and Wells Fargo (WFC). Those 4 banks account for $3.6 trillion of the $6.2 trillion of loans held at the US' largest banks. So, we will have a pretty good idea by 8:15 am EDT if a "private credit crisis" is on the immediate horizon.
Potential changes in SEC reporting requirements
Without going into any detail, simply imagine the market impact if any of the 4 US banks mentioned above weren't required to report quarterly. And the thought that such a reporting change isn't weighing heavily on the US capital markets entering the heart of earnings season is just that: "A thought."
For more detail on the impact of private credit on the US financial system, please contact Larry Domash on Bloomberg or LinkedIn or Garethmoody@empirasign.com.
Trading Model Output
For US credit spreads to widen significantly, retail credit fund outflows and declining US equity prices would be required. We did see US equity prices weaken and credit fund outflow Friday. 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 now modestly overvalued. Similarly, underlying equity value of 240 of the world's 255 largest issuers of corporate debt remain overvalued even after Friday trading.
Trading Model Indicators and Strategy for Tuesday
Corporate bond flows for the week ending October 8 were rose when compared with the week ended October 1. After Friday's trading and credit fund outflow, the stochastic model continues to view US credit valuations as slightly 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. 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.
Material Economic Indicators
None on Monday
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -25 % below average.
G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 77% of total TRACE volume.
High-Yield (HY) Trading
Volume: +6% above average.
G-255 Issuers: 13 of the top 25 traded bonds accounted for 48% of top 25 issuer volume and 50% of total TRACE volume.
Friday Credit Market Movement
U.S. CDX Index: +2.7 bp at 50.8 bp.
U.S. IG Cash Spreads: were (+4 to +11bp) wider with Autos underperforming.
CDX HY Index: fell -.7 @106.75 (per Bloomberg).
HY Cash Bonds: Were wider led by BB Energy.
High-Yield Activity
• Dealers sold $400mm of high yield bonds on Friday.
Most Bought HY Bonds: American Axle (AXL B3/B+)
Most Sold HY Bonds: Venture Global CALC (VENTGL Ba1/BBB-)
Investment Grade Activity
Dealers sold $1 bil of IG bonds on Friday.
Most Bought Sector: Big 6 Banks
Bank of America (BAC A1/A- attractive short)
Wells Fargo (A2/BBB+ attractive short)
Most Sold Sector: BBB TMT
T-Mobil (TMUS Baa1/BBB+ attractive long)
Verizon (VZ 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 170 undervalued bonds ($258 billion market value), with 46 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,417 bonds ($2.23 trillion) are overvalued per the stochastic credit trading model, with 522 short trade indicators.
U.S. Big 6 Banks (all Ratings): 298 bonds ($744 billion) overvalued, with 75 short indicators.
Single A and BB Energy: 97 bonds ($145.7 billion) overvalued, with 58 short indicators.
Single A Healthcare: 99 bonds ($148.3 billion) overvalued, with 49 short indicators.
Single A Industrials: 95 bonds ($104.1 billion) overvalued, with 33 short indicators.
G-255 Issuer News
Sales of tractors rose 4.1% in September, marking the first increase in 13 months, according to data from the Association of Equipment Manufacturers, a trade group representing companies in agriculture, forestry, construction, utility, and mining. John Deere Credit (DE A1/A attractive short both credit and equity ) reports results November 11 and Caterpillar Finance (CAT A2/A attractive short credit/attractive long equity) reports results October 29.
Lloyds Banking Group Plc (LLOYDS A3/A- attractive long credit and equity) intends to set aside an additional provision of £800 million and total provision of £1.95 billion represents the group's "best estimate" of the potential impact of the motor finance issue, including both redress and operational costs.
Exxon Mobil Corp (XOM AA2/AA- attractive long both credit and equity) Chief Executive Officer Darren Woods renewed criticism of the European Union's energy policies while praising US President Donald Trump's approach. Exxon slowing investment in Europe and selling assets, with Woods describing the bloc's climate and human rights regulations as "slowing things down and trying to over-prescribe impractical" solutions.
French banks and BPCE (BPCEGP Baa1/BBB+ attractive long) SFH and La Mondiale SAM raised funds with final books more than triple the deal size, while AXA SA's (A3/BBB+ attractive long) AXASA 5 â PERP was more mixed.
OpenAI agreed to buy Broadcom (AVGO A3/A- attractive long both credit and equity) custom chips and networking equipment in a multiyear deal. OpenAI will design the hardware and work with Broadcom to develop it, with the plan to add AI data center capacity.
Ford Motor (F Ba1/BBB- attractive short both credit and equity) is temporarily cutting production of at least five models including popular SUVs after a devastating fire at a the Novelis New York aluminum plant.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 26% 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: -7 bp YoY and -54 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 15th trading day in 22, as US equity prices fell and credit spreads widened materially Friday. 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
No new G – 255 supply on Friday and just 3 of world's largest issuers have sold 9 bonds totaling $7.7 billion of new bonds so far in October. Only $4 billion on G – 255 bonds were redeemed last week, bringing the total to $22 billion for October. Thus far no US G – 255 issuers have sold debt outside the United States.
Last week saw $9 billion of inflow into US IG and HY bond fund and ETFs. That is 28.5% more than in the week ended October 1.
Last week was the strongest week in 5 for inflow to US credit funds.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 522, -401 from Friday +42% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 47, +12 from Friday.
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 +3.5 basis points.
Current Status of trading indicators below:
Last week 1 long trade and 1 short trade reached their avoid trading level and was replaced by 1 new secondary long trade indicator.
Systematic Credit Trading Strategy October 13, 2025
Closed Positions: BMW (A2/A) BMW 4 1/2 08/11/30 reached its avoid trading level last week. The General Motors (Baa2/BBB) GM 5.45 09/06/34 reached its avoid trading level on Friday.
Enter New Longs: Las week the trading model added Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread. The 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. Friday'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 Friday: General Motors (Baa2/BBB) GM 5.45 09/06/34 reached its avoid trading level on Friday. BP (A2/A-). BPLN 3.06 06/17/41 was quoted @ its avoid trading level on Friday, but did not trade. The Broadcom (A3/A-) AVGO 4.8 2/15/36 trading +5bp to new issue spread was the new issue trade indicator added on Friday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 16, 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.