Systematic Credit and Equity G-255 Trading Indicators for October 6, 2025
Good Morning! For a third consecutive trading day both US credit and equity risk rallied without any data or catalyst. While US treasuries are lower overnight we are still near UST YTM lows on the year. We will hear this week from PepsiCo (PEP A1/A+ attractive short both credit and equity), Delta Airlines (DAL Baa2/BBB attractive long both credit and equity), and Charles Schwab (SCHW A2/A- attractive long credit and equity) and do not expect Schwab or Delta to disappoint. Pepsico has been disappointing for 6 quarters. Focus will be on unit volume growth.
No Government Economic Information? No Problem.
While we have seen progress in equity and credit valuations over the past week, we are still significantly outside levels reached 2 weeks ago in the belly of the overall US credit curve and significantly wider YoY to last year's 10+ year maturity tight spreads reached last November.
Credit Market Model Indicators
The trading model reached a 2025 peak for net short credit two weeks ago and credit spreads widened by roughly ~4.5 basis points before tightening since October 1. Longer-dated spreads remain wider than the five-year tights observed in November 2024. New supply from de-leveraging issuers represents the primary attractive long trade opportunity.
Key Economic information Friday
S&P Global September services and composite purchasing managers' indices for the US
Fell to 54.2 from 54.5 in August and 55.2 a year ago
Employment fell to 50.4 vs 52 in August.
Composite index fell to 53.9 from 54.6 in August and 54 a year ago
Trading Model Indicators and Strategy for Monday
ETF and US mutual fund ETF and U.S. mutual fund corporate bond flows accelerated in the week ended October 1, 2025, reducing pressure for wider spreads. The model views valuations as overvalued, identifying long opportunities only in new de-leveraging supply trading +2 bp or more 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. 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).
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days due to global regulatory requirements for material event disclosures.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -12% below average.
G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
Volume: average.
G-255 Issuers: 14 of the top 25 traded bonds accounted for 53% of top 25 issuer volume and 60% of total TRACE volume.
Thursday Credit Market Movement
U.S. CDX Index: -.1 bp at 47.1 bp.
U.S. IG Cash Spreads: were unchanged to (-1bp) tighter with US Financials outperforming.
CDX HY Index: unchanged @107.7 (per Bloomberg).
HY Cash Bonds: Were slightly higher financials were tighter.
High-Yield Activity
• Dealers bought $ 300 million of HY bonds on Friday.
Most Bought HY Bonds: Pemex (PEMEX B1/BBB attractive short)
Most Sold HY Bonds: Nissan Finance (NSANY Ba2/BB attractive short)
Investment Grade Activity
Dealers sold $400mm of IG bonds on Friday.
Most Bought Sector: Single A Autos
American Honda Finance (HNDA A3/- attractive short)
Hyundai Capital (HYNMTR A3/A- attractive Long)
Most Sold Sector: Single A Healthcare
Pfizer (PFE A2/A attractive short)
Merck (MRK Aa3/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 Insight: The stochastic credit trading model identifies 112 undervalued bonds ($156.8 billion market value), with 36 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,541 bonds ($2.393 trillion) are overvalued per the stochastic credit trading model, with 1085 short trade indicators.
U.S. Big 6 Banks (All Ratings): 309 bonds ($763.6 billion) overvalued, with 224 short indicators.
Single A and BB Energy: 105 bonds ($170.1 billion) overvalued, with 69 short indicators.
Single A Healthcare: 99 bonds ($148.3 billion) overvalued, with 80 short indicators.
Single A Industrials: 103 bonds ($112.7 billion) overvalued, with 79 short indicators.
G-255 Issuer News
BBVA (BBVASM A3/BBB credit indicator short, equity indicator long) Chief Executive Officer Onur Genc said the bank is very convinced that it's going to be above the 50% minimum threshold required for the bid to be successful in acquiring Banco Sabadell.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 45% 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 +18 bp YoY but down -42 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities and credit markets correlated directionally for the 12th day in 17. Yesterday we explained that this correlation while historically stronger has broken down in the past 10 months owing to the change in sector weightings in US equity and US bond indices as well as the inclusion of non – US (Yankee) issuers in bond indices. Equities edged higher on Thursday, while corporate credit was slightly tighter. US 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 Friday with the US Securities and Exchange Commission closed. No G – 255 non – US issuance on Friday.
We saw slower Investment Grade ETF and mutual fund inflows last week and a reversal of HY outflow to inflow.
There were 13 G – 255 bond maturities totaling $18 billion over the past week.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1059, +26 from Thursday +99% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators: 36, +7 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 3, 2025
Closed Positions: Last week no trading model indicators closed on long or short trades.
Enter New Longs: This morning the trading model adds 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 Monday 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. Monday's Basket Trade long/ short ratio 60.1%
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: The trading model adds Capital One (Baa1/A-) COF 5.197 09/11/36 as a long trade +2bp to new issue spread.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 6, 2025)
Performance Summary: Total Trades: 170 (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: 14 tightened by -1.77 bp.
Remaining Shorts: 9 tightened by -11.73 bp.
Average Spread Movement: ±6.96 bp in the indicated 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.