Systematic Credit and Equity G-255 Trading Indicators for October 7, 2025
Good Morning! US credit and equity risk rallied for a fourth consecutive trading day without significant data catalysts. However, Monday's headlines drove equities to another all-time high and pushed credit spreads close to 2025 tights.
Headlines Impacting Credit Spreads on Monday
The all-equity merger between Fifth Third Bancorp (FITB Baa1/BBB+, attractive short credit/attractive long equity) and Comerica tightened US regional credit spreads slightly. US auto finance bonds rallied as the Trump administration hinted at eliminating trade tariffs for US-manufactured vehicles. Concurrently, the Wall Street Journal reported significant damage at Novelis' New York aluminum plant, a supplier to Ford, among others.
While US auto credit rallied both Friday and Monday, Ally Financial (ALLY Baa3/BBB-, attractive long credit and equity) issued 7-year debt in July (ALLY 5.548 07/31/33), which trades +23bp wide of its new issue spread following recent bankruptcy filings by two subprime auto lenders. Notably, Ally's 10-Q reveals that consumer auto finance constitutes 60% of its loan book, with non-accrual consumer auto loans declining as of June 30. This suggests the market may be overlooking Ally's publicly available loan book data.
French Prime Minister Sébastien Lecornu's resignation ("jeter l'éponge") elicited minimal market reaction. Simply put, France's budget deficit is less severe than the US's, and while France is more politically divided, its EU membership remains unquestioned. France is likely to resolve its budget issues before the US. USD-denominated French bank bonds were net bought on Monday, closing unchanged.
Expected Earnings Reports
Starting Thursday, earnings reports from PepsiCo (PEP A1/A+, attractive short credit and equity), Delta Airlines (DAL Baa2/BBB, attractive long credit and equity), and Charles Schwab (SCHW A2/A-, attractive long credit and equity) are due. Expectations are high for Schwab and Delta, but PepsiCo has underperformed for six quarters, with focus on unit volume growth. Constellation Brands' (STZ, not a G-255 issuer) Monday results suggest challenges for US consumer names. In the two weeks following PepsiCo's earnings, 41 G-255 issuers, including 22 banks, will report.
Trading Model Output
The trading model is within 5bp of signaling "significantly overvalued." For US credit spreads to widen significantly, retail credit fund outflows and declining US equity prices would be needed. The model reacts to market conditions, buying volatility, and the key question is how Q3 earnings and outlooks will impact equity prices.
Please note that the trading model does not predict, it reacts and is a buyer of volatility. The question is what impact will 3Q reported earnings and outlook have on equity prices?
Credit Market Model Indicators
Two weeks ago, the trading model peaked for net short credit positions, with spreads widening by ~4.5bp before tightening since October 1. Longer-dated spreads remain slightly wider than the five-year tights observed in November 2024. New supply from de-leveraging issuers offers the primary attractive long trade opportunities.
Trading Model Indicators and Strategy for Tuesday
Corporate bond flows into ETFs and US mutual funds accelerated in the week ended October 1, 2025, easing pressure for wider spreads. However, US credit spreads are nearing 2025 tights, and the model views valuations as overvalued, identifying long opportunities only in de-leveraging supply trading +2bp 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.
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -14% below average.
G-255 Issuers: 99 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 76% of total TRACE volume.
High-Yield (HY) Trading
Volume: average.
G-255 Issuers: 13 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 57% of total TRACE volume.
Thursday Credit Market Movement
U.S. CDX Index: -.5 bp at 46.6 bp.
U.S. IG Cash Spreads: were -1bp) tighter with US Financials outperforming.
CDX HY Index: rose +.15 @107.85 (per Bloomberg).
HY Cash Bonds: Were tighter led by BB energy.
High-Yield Activity
• Dealers neither bought, nor sold bonds on Monday.
Most Bought HY Bonds: CSC Holdings (CSC Ca/CCC- attractive long)
Most Sold HY Bonds: Newal Brands (NWL B1/B+ attractive short)
Investment Grade Activity
Dealers bought $350mm of IG bonds on Monday.
Most Bought Sector: Single A TMT
Apple (AAPL Aaa/AA+ attractive long)
Comcast (CMCSA A3/A- attractive short)
Most Sold Sector: BBB TMT
ATT (T Baa2/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 92 undervalued bonds ($133.4 billion market value), with 25 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,543 bonds ($2.393 trillion) are overvalued per the stochastic credit trading model, with 1091 short trade indicators.
U.S. Big 6 Banks (All Ratings): 309 bonds ($761.5 billion) overvalued, with 225 short indicators.
Single A and BB Energy: 105 bonds ($173.8 billion) overvalued, with 68 short indicators.
Single A Healthcare: 98 bonds ($146.6 billion) overvalued, with 84 short indicators.
Single A Industrials: 103 bonds ($111.4 billion) overvalued, with 74 short indicators.
G-255 Issuer News
Fifth Third Bancorp (FITB Baa1/BBB+, attractive short credit/attractive long equity) agreed to acquire Comerica Inc. for approximately $10.9 billion in an all-equity transaction. This will be the largest US bank deal of 2025, creating the ninth-largest bank in the US with approximately $288 billion in assets.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 48% 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.
2025 10-Year Credit Spreads
Year-over-Year (YoY): Wider compared to last year.
Year-to-Date (YTD): Wider YTD.
We are now within 9bp at the 10Y level from 2025 tight spreads.
UST 10-Year Rates: Up +18 bp YoY but down -42 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 the same direction for the 13th day in 18, despite the US Dow Jones failing to advance on Monday. 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. The 2025 correlation between 10-year US corporate credit and equity prices is 74%, the fifth lowest on record.
New USD G-255 supply and fund flow data
2 G-255 issuers sold USD debt on Monday with T - Mobil (TMUS) selling the first overpriced deal on since Labor Day. Two the three bonds offered (the $800mm TMUS 4 5/8 01/15/33 and the $ 1 billion TMUS 5.7 01/15/56 ) were priced inside of existing secondary T-Mobil bonds.
Toronto Dominion continued the steady supply of Yankee issuance and all but the TD 3Y floating rate note (FRN) issues were priced at a reasonable discount to secondary USD TD issues.
The lack of new supply owing the SEC shutdown combined with credit fund inflows and almost $20 billion of G-255 issuer bond retirements is pushing USD credit spreads to their overall 2025 tight levels.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1091, +6 from Monday +99% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators: 25, -11 from Monday.
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 7, 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 62.5%
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: None as earnings season begins on Wednesday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 7, 2025)
Performance Summary: Total Trades: 171 (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: 15 tightened by -2.1 bp.
Remaining Shorts: 9 tightened by -14.07 bp.
Average Spread Movement: ±6.84 bp in the indicated direction.
Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20 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.