Systematic Credit and Equity and G-255 Trading Indicators for October 3, 2025
Good Morning!
Day 2 without major data releases saw materially lower trading volumes, influenced by the absence of economic data and the Jewish holiday. Directionally, both credit spreads and equity prices inched tighter/higher. No material new G-255 supply emerged on either side of the pond. However, headlines focused on potential tariffs and the elimination of the $7,500 federal tax credit for new electric vehicle (EV) purchases—topics we covered yesterday.
While U.S. 3Q EV sales reached a record high, the equity and credit markets responded oppositely. The tax credit roll-off raises significant questions about 4Q 2025 and 2026 results for automakers where the U.S. market accounts for over one-third of total sales (primarily Ford and General Motors). Auto equity prices declined, yet credit spreads for Ford and General Motors tightened.
Correlation of US equities and 10Y US credit spreads: US autos
As noted yesterday, the divergence between U.S. auto equity prices and credit spreads exemplifies where the typical credit-equity relationship breaks down.
When auto sales decline (not yet forecasted, but new estimates are expected post-3Q earnings at month-end), financing needs for auto finance companies decrease. We observed this in 2Q for several issuers, including Daimler Truck (DTGGR, A3/A-), BMW (BMW, A2/A), Mercedes-Benz Group (MBBGR, A2/A), and Toyota (TOYOTA, A1/A+), where trade indicators shifted from short to long.
As a result, net debt for the Single A auto sector declined after 2Q results, driving a rally in Single A-rated auto credit spreads.
However, Ford, General Motors, and Stellantis (large U.S. issuers) did not experience sufficient volume declines in 2Q 2025 to reduce balance sheet leverage.
Both credit and equity markets are anticipating a slowdown in 4Q 2025 auto sales, with sufficient 3Q 2025 unit sales to shift General Motors (GM) and Ford balance sheets toward de-leveraging. This dynamic explains the divergent movements in credit spreads (tightening) and equity prices (declining) for these automakers.
Model output for US Autos
The model avoids adding risk to G-255 issuers reporting within 30 days, adhering to global regulatory requirements for material event disclosures. No changes to auto model indicators are expected until late October. Due to limited government data and earnings, model indicators signal strongly overvalued conditions but offer minimal actionable trades over the next five trading days.
Credit Market Model Indicators
The trading model reached a 2025 peak for net short credit last Tuesday, with spreads widening by ~4.5 basis points before Thursday's session. 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 Thursday
Challenger, Gray & Christmas reported 54,064 job cut announcements in September; 946,426 year-to-date.
Regional Breakdown: East 9,957; Midwest 5,752; West 29,128; South 9,227
Trading Model Indicators and Strategy for Friday
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).
Performance
Of 170 long/short trades in 2025 (marked via TRACE), 87% achieved ±5 bp targets, averaging ±6.90 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.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -23% below average.
G-255 Issuers: 93 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 70% of total TRACE volume.
High-Yield (HY) Trading
Volume: -20% below 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 47.2 bp.
U.S. IG Cash Spreads: were unchanged to (+2bp) wider with US Financials underperforming.
CDX HY Index: -.1 @107.7 (per Bloomberg).
HY Cash Bonds: Were slightly higher financials were tighter.
High-Yield Activity
• Dealers bought $ 350 million of HY bonds on Thursday.
Most Bought HY Bonds: CSC Holdings (B1/BB- attractive long)
Most Sold HY Bonds: Pemex (PEMEX B1/BBB attractive short)
Investment Grade Activity
Dealers sold $400mm of IG bonds on Thursday.
Most Bought Sector: Big 6 banks
Wells Fargo (WFC A2/BBB+ attractive short)
Morgan Stanly (MS A2/A attractive short)
Most Sold Sector: Single A Industrials
John Deere Credit (DE A1/A attractive short)
Lockheed Martin (LMT A2/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 115 undervalued bonds ($180 billion market value), with 25 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,533 bonds ($2.39.4 trillion) are overvalued per the stochastic credit trading model, with 1059 short trade indicators.
U.S. Big 6 Banks (All Ratings): 306 bonds ($761 billion) overvalued, with 232 short indicators.
Single A and BB Energy: 105 bonds ($168.1 billion) overvalued, with 69 short indicators.
Single A Healthcare: 99 bonds ($148.3 billion) overvalued, with 80 short indicators.
Single A Industrials: 100 bonds ($109.8 billion) overvalued, with 78 short indicators.
G-255 Issuer News
The expiration of the $7,500 federal EV tax credit on September 30, 2025, drove record U.S. EV sales in Q3.
Ford (F, Ba1/BBB-; attractive short credit and equity)
Total EV Sales: 85,789 electric vehicles in Q3, up 19.8% year-over-year.
Mustang Mach-E: Achieved its best-ever quarter, with sales up 50.7% year-over-year.
F-150 Lightning: Recorded 10,005 sales, up 16.5% quarter-over-quarter, maintaining its position as the bestselling EV truck in the U.S.
General Motors' (GM Baa2/BBB attractive short credit and equity) Quarter
Total EV Sales: GM reported 66,501 electric vehicles sold in Q3, a record for the company.
Equinox EV: Became the top-selling non-Tesla electric vehicle in the U.S.
Cadillac Brand: Three Cadillac models ranked among the top 10 bestselling luxury EVs in the U.S. through September.
Year-to-Date Performance: GM's EV sales reached 144,668 in 2025, exceeding its 2024 full-year total of 114,432, a 103% year-over-year increase.
Tesla's Milestone Quarter
Tesla delivered 497,009 vehicles in Q3, setting a new quarterly record for the EV leader.
Impact of Federal Tax Credit Expiration
Automakers, including Ford, GM, and Lucid Group, are actively exploring alternative incentives to sustain consumer demand. The absence of the tax credit may lead to a sales slowdown in Q4 2025 and Q1 2026, testing the resilience of the U.S. EV market.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 35% 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 +25 bp YoY but down -47 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities and credit markets correlated directionally for the 11th day in 16. 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 Thursday with the US Securities and Exchange Commission closed.
Commerzbank (CMZB) sold 5Y covered fixed bond in €uros.
The following are US fund flows for the week ended Oct. 1, compared to a week earlier, according to LSEG Lipper.
Short and intermediate investment-grade bonds: $1.81b inflow vs. $1.83b inflow
High-yield notes: $1.19b inflow vs $353.5m outflow
Treasuries: $7.78b outflow vs. $7.89b inflow
US leveraged loans: $493.2m inflow vs. $162.4m inflow
Mortgage-related: $248.1m inflow vs. $205m inflow
• High-yield ETFs swung by $1.68b to $1.57b
• Corporate bond ETFs expanded by $2.51b to $3.2b
• Dedicated Corporate IG ETF inflows dropped 38% to just over $400mm,
• Dedicated HY inflows went from -$300mm outflow to $1.4 bil inflow.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1059, +24 from Thursday +98% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators: 28, +1 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: 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 October 3, 2025
Closed Positions: Last week the trading model indicators closed on short trade.
Enter New Longs: On Wednesday Lowe's (Baa1/BBB+) LOW 4 1/2 10/15/32 was added as a long trade +3 bp to new issue spread.
3. Enter New Short trades: Monday 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. Thursday'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 Thursday: None.