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Fri, October 31, 2025

Systematic Credit and Equity G-255 Trading Indicators for October 31, 2025

Good morning. While more of the 255 world's largest corporate issuers reported operating results that moved equity markets both sideways and backwards, it was the 6 maturity, $30 billion META (META Aa2/AA- attractive long both credit and equity) new issue trade that moved all risk markets and solidified the quantitative statement which our systematic trading model has been documenting for the past 21 months. That being that in today's global risk markets, the corporate bond investor has become the corporate equity holders "bit…." Ehh "subservient."

What became obvious with the new Meta is finally ushering in the global market corporate cultural era of "bondholders will support share prices by financing share repurchase and dividend payments to equity holders."

The impact on valuation and trading liquidity of both corporate bonds and equities is changing courtesy of… well Facebook!

While we have written and provided the actual quantification of the levering of large global balance sheets to both compensate and support share prices, yesterday's new supply when combined with Meta's Wednesday's 3Q disclosure makes clear that the Graham & Dodd principal of returning capital to shareholders primarily using internally generated cash is not part of the Facebook corporate mandate.

So, we are clear we have no qualms about Meta's message or intent. In fact, Meta's regular financial and corporate governance disclosure is amongst the top publications worldwide. Meta's statements and intent to use the $40 billion to repatriate money to shareholders are quite clear and well laid out in their public filings.

It's the financial press that are creating the "fairy tale" currently known as "AI capex." We've attached an excerpt from last night's Systematic Earnings Digest for September 30:

Financial Position: Meta has generated $172 billion in cash over the past 7 quarters while spending $230 billion. Of that outflow, only $115 billion (50%) relates to capex or reinvestment in the core Meta businesses. The company has returned $65.3 billion to shareholders via share repurchases and dividends and paid $23.7 billion in taxes tied to employee share awards over the same period. In total, 43% of every dollar of operating cash flow has been returned to shareholders and employees.

As a result, Meta's net cash position has declined from $47 billion to $15.6 billion in less than 2 years.

On October 30, 2025. Meta raised $30 billion in an unprecedented 6-part new issue of Meta corporate bonds ranging from 5 to 40 years in maturity. Given the growth in Meta's spending rate, the company should run through money raised in less than 6 quarters.

Make no mistake, it's not Meta claiming they need to come to the US corporate bond market to fund capital expense owing to AI, it's the financial press and likes of Bloomberg and others that are misrepresenting what is now becoming the sea – change in global corporate finance.

The use of the balance sheet for the largest corporate debt issuers to benefit shareholders is not a new phenomenon. However, quantitatively speaking, the magnitude and impact if the change in balance sheet capital management is changing thanks to: "If you guys were the inventors of Facebook, you'd have invented Facebook." Sorry I can't help myself but to employ a movie line from "Social Network." However, the new Meta offering is as brazen to the capital markets as the Jesse Eisenberg movie line was 15 years ago.

Trading Model Indicators:

Our systematic trading model sees all six new META bond offerings as attractive with an average expected spread tightening of -15 basis points.

Our point: As the Meta type supply becomes more prevalent in the global corporate bond markets, something is going to have to "give" in terms of valuation. The question is how much longer will the retail investor want to finance 20% + annual shareholder returns via a 4% - 5% coupon return with interest rate and corporate bond volatility attached?

Weekly US Corporate Bond inflow stagnated a bit in the week ending October 29. The Systematic trading model indicators no longer see G – 255 issuer equity prices as overvalued. G-255 corporate debt is still modestly overvalued.

Top Short-Indicated Sector:

BBB Autos (All currencies)

Top 3 Long-Indicated Sectors:

US Regional Banks (USD)

U.S. Single A TMT (USD/EUR)

U.S. BBB TMT (all currencies)

Trading Allocation Strategy:

47.5% Long: Undervalued, deleveraging bonds.

32.5% 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 Reported Thursday:

  • The Labor Department isn't publishing its weekly initial jobless claims report due to the government shutdown.

Credit Trading Thursday

Investment-Grade (IG) Trading

  • Volume: +49 % above average.

  • G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 89% of total TRACE volume.

High-Yield (HY) Trading

  • Volume: +15% below average.

  • G-255 Issuers: 14 of the top 25 traded bonds accounted for 61% of top 25 issuer volume and 56% of total TRACE volume.

Thursday Credit Market Movement

  • US CDX Index: rose +.9bp at 47.5 bp (includes -4 bp of forward roll)

  • US IG Cash Spreads: (+2 to +4 bp) BBB communications underperformed.

  • CDX HY Index: -0.2 bp at 107.4 (per Bloomberg)

  • HY Cash Bonds were wider Thursday, with TMT underperforming.

High-Yield Activity

• Dealers bought $1.2 bill of high yield bonds on Thursday.

  • Most Bought HY Bonds: Altice France (SFRFP Caa1/CCC+)

  • Most Sold HY Bonds: CCO Holdings (CHTE B1/BB- attractive long)

Investment Grade Activity

  • Dealers bought $3.5 billion of IG bonds on Thursday.

  • Most Bought Sector: Single A Healthcare

Sanofi (SANFP A1/AA attractive long)

Eli Lily (LLY Aa3/A+ attractive short)

  • Most Sold Sector: Big 6 Banks

Bank of America (BAC A1/A- attractive short)

Citigroup (C A3/BBB+ attractive long)

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 132 undervalued bonds ($195.6 billion market value), with 47 long trade indicators across the 6,000-bond USD universe.

Short Opportunities

  • 1,439 bonds ($2.26 trillion) are overvalued per the stochastic credit trading model, with 842 short trade indicators.

  • U.S. Big 6 Banks (all ratings): Are no longer a sector short trade indicator as of October 22.

  • Single A and BB Energy: Are no longer a sector short indicator as of October 27.

  • Single A Healthcare: Is no longer a sector short trade indicator as of October 22.

  • Single A Industrials: Are no longer a sector short trade indicator as of October 22.

  • BBB Autos: 82 bonds ($98.5 billion) are overvalued, with 68 short trade indicators

U.S. IG Credit Valuation and Spreads

U.S. IG Credit Valuation and Spreads

  • Credit Spread Recovery: U.S. credit spreads have recovered 55% of the widening observed from November 12, 2024, to April 10, 2025.

  • Model Valuation: IG and HY markets show modest overvaluation. Post earnings announcements from 110 of the world's 255 largest issuers of corporate debt 142 issuers are increasing leverage.

2025 10-Year Credit Spreads

  • Year-over-Year (YoY): are wider compared to last year.

  • Year-to-Date (YTD): are wider.

  • UST 10-Year Rates: -18. bp YoY and -27 bp YTD.

Bloomberg 10Y credit spreads are derived by taking the Moody's relevant index yield and subtracting the UST 10Y YTM

3 G-255 Yankee Banks also sold new bonds on Thursday along with the Meta 6-part $30 billion transaction.

All 3 bank trades had significant concession according to our trading model owing the competition for demand with the new Meta bonds.

  • Over the past 8 years NatWest has been the top UK new issue (+22 days) performer (issuer is de-levering).

  • These are USD offerings # 15 -18 from HSBC in 2025 - Just over $19 billion thus far (issuer has more cash than debt).

  • SANTAN is re-levering but actually de-risking its balance sheet. (Please see October 29 earnings digest).

Taxable bond ETFs saw estimated net issuance of $9.29 billion, and municipal bond ETFs had estimated net issuance of $1.39 billion. According to Bloomberg ETF tracker:

Investment grade corporate ETFs had $2.04 billion of net inflow last week.

High Yield corporate ETFs had $1.44 billion of net inflow last week.

For the week ending October 29, LSEG Lipper reports:

  • Short and intermediate investment-grade bonds: $1.82b inflow vs. $3.72b inflow

  • High-yield notes: $459.2m inflow vs. $96.5m outflow

  • Treasuries: $314.7m inflow vs. $2.68b inflow

  • US leveraged loans: $132m outflow vs. $753.8m outflow

  • Mortgage-related: $85.5m inflow vs. $262.6m inflow

US Equity Correlation to Overall US Credit Spreads

US equities and credit markets showed directional trading correlation for the first time since Monday as US technology earnings left equity markets doubting. While the correlation between US equity prices and 10-year US credit spreads is a mathematical certainty, the number of trading days when the direction of the two markets varies in a given year depends on exogenous factors. The statistical average of directional correlation between the SPX and US credit spreads is close to 80% over the past 33 years, with a range of 74% to 83%.

  • Attractive Long Indicators: 47, +6 from Thursday and -57% below the 200-day moving average of all model long trade indicators.

  • Attractive Long Market Cap accounts for: 32% of all undervalued Systematic Credit capital

  • Attractive Short Indicators 849, -132 from Thursday and +66% above the 200-day moving average of all model short trade indicators

  • Attractive Short Market Cap accounts for: 58% of all overvalued Systematic Credit Capital

Systematic Portfolio Trading Model Indicators

  • Prioritize Long Positions: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.

  • Short Positions: Target releveraging 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 67.5% long position threshold is reached.

  • Current Status: Add new supply trades where the issuer is deleveraging; add new issue bonds where spreads widened by +2 basis points.

  • Current Status of Trading Indicators: Last week, one long trade reached its avoid trading level. The trading model added three long indicators and one short indicator.

Systematic Credit Trading Strategy – October 31, 2025:

  • Closed Positions: Capital One (Baa1/A-) COF 5.197 09/11/36 additions +2 bp and +4 bp to NIP reached their avoid trading level on Monday.

Enter New Longs: On Monday, Broadcom (A3/A-) AVGO 4.8 02/15/36 +2 bp from NIP was added as a new long indicator. The model added new issues Philip Morris (A2/A-) PM 4 1/4 10/29/32 and Lloyds Bank (Baa3/BBB-) LLOYDS 6 5/8 PERP as long trade indicators. Lloyds Bank (A3/A-) LLOYDS Float 11/04/31 was added by the trading model as another long trade indicator on Tuesday. The trading model adds Meta (AA3/ AA-) META 4 7/8 11/15/35 and META 5 1/2 11/15/45 new supply long trade indicators on Friday.

  • Enter New Short Trades: The trading model added General Motors Financial (Baa2/BBB) GM 2.7 06/10/31 (short indicator) post new GM supply last week.

Monitor Trade Position Composition:

  • Track the percentage of long positions relative to the total portfolio.

  • If replacing long positions that have reached their avoid trading level pushes the portfolio above the 65% long hurdle, initiate short positions in releveraging issuers (avoiding 7-year maturities) at a 1:1 ratio for additional long positions.

  • Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic strategy.

  • Look for individual bond indicators to change overnight: Historic trading levels are leading to overnight adjustments to long, short and avoid indicator levels.

Thursday's Basket Trade Long/Short Ratio: 72%

Our systematic 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: The trading model adds Meta (AA3/ AA-) META 4 7/8 11/15/35 and META 5 1/2 11/15/45 new supply long trade indicators on Friday.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 30, 2025)

Performance Summary: Total Trades: 180 (1% of total trades).

  • Long Indicators: 124/141 reached avoid-trading levels, tightening by -9.22 bp.

  • Short Indicators: 29/38 reached avoid-trading levels, widening by +5.62 bp.

  • Remaining Longs: 18 widened by +.22 bp.

  • Remaining Shorts: 9 tightened by -10.71 bp.

  • Average Spread Movement: ±6.70 bp in the indicated direction.

  • Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.

  • Average trade holding period: 20.5 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.