Systematic Credit and Equity G-255 Trading Indicators for October 1, 2025
Good Morning! Nike (NKE, not a G-255 issuer) reported its Q1 FY2026 results on Tuesday. According to Bloomberg, "Nike Inc.'s turnaround efforts are starting to pay off as the world's largest sportswear company realigns the business around specific sports such as running and basketball." Sales declined 1% in the quarter, with gains in Nike's wholesale segment offset by a 4% drop in Nike Direct sales. The company's guidance projects a low-single-digit sales decline for the current quarter, aligning with market expectations. Nike shares rose 4.3% at 6:24 p.m., with results viewed positively. NKE trades at a forward P/E ratio of 42x, higher than most AI equities.
This serves as a harbinger of broader market trends. While some tech companies have exceeded earnings expectations and banking results are anticipated to be strong, sectors like U.S. consumer, transports, industrials, healthcare, and energy are unlikely to achieve record earnings this quarter. Yet, U.S. equities are trading at record highs.
Trading Model Update
Our trading model adjusted overnight, refraining from adding long positions due to the lack of relative value in existing secondary U.S. investment-grade (IG) and high-yield (HY) bonds (6,000 total). For the model to shift to a "short-only" stance, we would need to see declining equity prices and negative U.S. corporate bond fund flows (ETF data pending).
Impact of Government Shutdown
The U.S. government shutdown began after Congress failed to agree on a stopgap funding measure to extend operations to November 21. President Donald Trump has signaled plans to use the shutdown to eliminate numerous government jobs. The SEC is fast-tracking a proposal to shift most companies from quarterly to semi-annual reporting. The Bureau of Labor Statistics (BLS), currently leaderless, will not publish data during the shutdown, leaving markets reliant on ADP, Redbook comparable store sales, U.S. railcar loadings, and University of Michigan survey data.
Global Context and Transparency
As noted yesterday, only 21 of the world's 255 largest corporate debt issuers report semi-annually. Global capital markets are more concerned about the lack of U.S. government data than U.S. corporate reporting. The key question on October 1, 2025, is whether U.S. risk market exuberance—evidenced by Nike's 41x earnings multiple—will persist. Outflows from U.S. capital markets may become evident in the coming weeks, depending on the shutdown's duration.
Credit Market Model Indicators
The trading model hit a 2025 peak for net short credit last Tuesday, with credit spreads widening by ~4 basis points (bp) since then. Longer-dated credit spreads remain wider than the five-year tight levels seen in November 2024. New supply from deleveraging issuers is the only attractive long trade opportunity.
Key Economic information Tuesday
U.S. Job Openings: Little changed in August, with hiring subdued (3.2% hiring rate, lowest since June 2024). Layoffs remained low.
Voluntary Job Quits: Dropped to the lowest level in 2025, signaling reduced confidence in finding new jobs.
Consumer Confidence: Fell to a five-month low of 94.2 in September (Conference Board), below the 96 median estimate.
CFTC Leadership: Brian Quintenz's nomination to chair the CFTC was withdrawn. A new nominee is expected soon.
BLS Leadership: EJ Antoni's nomination to lead the BLS was pulled amid criticism. The White House is seeking a new candidate committed to data integrity.
Trading Model Indicators and Strategy for Tuesday
The model continues to suggest U.S. credit is overvalued, with wider spreads likely until fund flow data is released.
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).
Performance
Of 168 long/short trades in 2025 (marked via TRACE), 89% achieved ±5 bp targets, averaging ±6.97 bp per trade.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, as global regulatory requirements for reported material events could impact trading without notice.
USD Systematic Trading Model
Top 3 Short-Indicated Sectors
BBB Autos (USD/EUR)
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).
Performance
Of 168 long/short trades in 2025 (marked via TRACE), 89% achieved ±5 bp targets, averaging ±6.97 bp per trade.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days due to global regulatory requirements for material event disclosures.
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: +63% above 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: 69% above average.
G-255 Issuers: 13 of the top 25 traded bonds accounted for 44% of top 25 issuer volume and 59% of total TRACE volume.
Tuesday Credit Market Movement
U.S. CDX Index: -.2 bp at 47.40 bp.
U.S. IG Cash Spreads: were unchanged to (+2bp) wider with US Utilities underperforming.
CDX HY Index: unchanged @ 107.7 (per Bloomberg).
HY Cash Bonds: Were slightly lower.
High-Yield Activity
• Dealers bought $ 1.3 billion of HY bonds on Tuesday.
Most Bought HY Bonds: CCO Holdings (B1/BB- attractive long)
Most Sold HY Bonds: Hovnanian Enterprises (HOV B3/BB-)
Investment Grade Activity
Dealers bought $2 bil of IG bonds on Tuesday.
Most Bought Sector: US Big 6 banks
Citigroup (C A3/BBB+ attractive long)
Morgan Stanley (MS A1/A- attractive short)
Most Sold Sector: Single A Healthcare
Thermo Fisher (TMO A3/A- attractive short)
Merck (MRK Aa3/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: The stochastic credit trading model identifies 100 undervalued bonds ($155 billion), with 23
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,546 bonds ($2.43 trillion) are overvalued per the stochastic credit trading model, with 1034 short trade indicators.
U.S. Big 6 Banks (All Ratings): 308 bonds ($769 billion) overvalued, with 224 short indicators.
Single A and BB Energy: 106 bonds ($168.2 billion) overvalued, with 70 short indicators.
Single A Healthcare: 101 bonds ($150.3 billion) overvalued, with 82 short indicators.
Single A Industrials: 101 bonds ($110.8 billion) overvalued, with 72 short indicators.
G-255 Issuer News
President Trump announced TrumpRx, a government-run website for purchasing drugs directly from manufacturers. Pfizer (PFE A2/A, attractive long for credit and equity) will offer select drugs at reduced "most favored nation" prices to Medicaid and introduce new drugs at lower prices. In exchange, Pfizer gains a three-year exemption from national-security-related tariffs, contingent on domestic manufacturing investment.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 39% 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): Tighter compared to last year.
Year-to-Date (YTD): Tighter YTD.
UST 10-Year Rates: Up +42.5 bp YoY but down -41 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities and credit markets failed to correlate directionally for the fourth trading day in 15 and the seventh time in September 2025. Equities edged higher, while corporate credit declined. Historically, equities tend to rally post-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
Tuesday 4 new G-255 issuers sold debt with the most attractive offering, the non-investment grade Carnival Corp (CCL Ba3/BB+) selling 3 ½ year bonds with a 5.125% coupon.
Carnival has now refinanced over 70% of its existing debt structure.
September has been the largest month of the year for G – 255 issuers with 69 issuers selling 164 bonds totaling $161 billion of new supply. New G-255 USD supply is now roughly flat in 2025 v. 2024. We expect new issue in October (post US Government shut down) to be materially lower than September. Our trading model indicators remain attractive long for only recent new supply of de-levering issuers trading more than +2 bp wide of new issue spread.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1034, +19 from Tuesday +98% above the 200 day moving average of all model short trading recommendations.
Attractive long indicators: 23, -2 from Tuesday.
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 63% long position threshold is reached.
Current Status: No recent deleveraging new supply trades; new issue 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 September 30, 2025
Closed Positions: Last week the trading model indicators closed on short trade.
Enter New Longs: Last week, 2 long new issue indicators were added to the long/short basket trade.
3. Enter New Short trades: Last night the trading model 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. Tuesday's Basket Trade long/ short ratio 61.9%
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 Tuesday: (BP A2/A) BPLN 3.06 06/17/41 was added as a short trade indicator.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 30, 2025)
Performance Summary: Total Trades: 168 (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.