Systematic Credit and Equity G-255 Trading Indicators for October 20, 2025
Good Morning! U.S. equity futures opened with a slightly positive bid, while the corporate bond market remained unchanged. French Treasuries widened by +3 basis points following S&P's downgrade to A+. Zions Bancorp (ZION) and Western Alliance Bancorp (WAL) will provide earnings updates tomorrow, including details on fraud and apparent missing collateral from one borrower.
Seventeen of the 19 largest U.S. banks, representing nearly 70% of loan capital on bank balance sheets, have reported. Credit quality remains stable, with Non-Performing Assets near their lowest levels in the past decade.
The past seven trading days have seen eight positive equity signals for U.S. banks, the highest number since early 2024.
Reported Earnings: 26 issuers $1.46 trillion of USD trading market capital.
Of the six non-bank reports, Abbott Labs (ABT) and Johnson & Johnson (JNJ) will not disclose balance sheet details until their 10-Q filings.
Amongst the 26 G-255 issuer reports, United Airlines (UAL) increased net financial leverage, while American Express (AXP) reduced leverage year-over-year.
Financial leverage on bank and non-bank balance sheets continues to rise, though at a slower pace than in Q2 2025. Dividends and share repurchases are growing faster than reported revenue.
Trading Model Output:
Credit trading indicators fell to 27% above average for short trade indicators and 50% below average for long trade indicators on Friday. Flows into credit ETFs and mutual funds fell by 50% in the week ended October 15.
Credit Market Model Indicators:
Both US Investment Grade and High Yield systematic trading indicators show USD credit as modestly overvalued. Similarly, the underlying equity value of 240 of the world's 255 largest issuers of corporate debt remains overvalued even after Friday's trading.
Trading Model Indicators and Strategy for Monday:
After Friday's trading, the stochastic model continues to view U.S. credit valuations as overvalued, identifying long opportunities in deleveraging new supply and deleveraging new supply trading behind new issue spreads.
Top 3 Short-Indicated Sectors:
US Big Six Banks (All currencies)
USD Single A Healthcare
Single A Industrials (USD)
Top 3 Long-Indicated Sectors:
US Regional Banks (USD)
U.S. Single A TMT (USD/EUR)
U.K. BBB TMT (all currencies)
Trading Allocation Strategy:
45% Long: Undervalued, deleveraging bonds.
35% 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. Wednesday's announcements from Zions Bancorp and Western Alliance Bancorp are examples of why this risk management guideline is in place.
Material Economic Indicators Reported Friday:
We will see 42 of the world's largest 255 issuers of corporate debt report results this week. Only 7 of those reports will come from banks.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: -1 % below average.
G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 77% of total TRACE volume.
High-Yield (HY) Trading
Volume: -5% below average.
G-255 Issuers: 15 of the top 25 traded bonds accounted for 50% of top 25 issuer volume and 46% of total TRACE volume.
Friday Credit Market Movement
U.S. CDX Index: -1 bp at 49.5 bp.
U.S. IG Cash Spreads: were unchanged to (+2bp) wider TMT and Energy underperforming.
CDX HY Index: rose +.2 @107.05 (per Bloomberg).
HY Cash Bonds: Were tighter led by BB healthcare.
High-Yield Activity
• Dealers sold $300mm of high yield bonds on Friday.
Most Bought HY Bonds: Altice (SFRFP Caa1/CCC+)
Most Sold HY Bonds: CSC Holdings (CSC Caa1/CCC+)
Investment Grade Activity
Dealers sold $300mm of IG bonds on Friday.
Most Bought Sector: Yankee Banks
Royal Bank of Canada (RY A1/A)
Credit Agricole (ACAFP Baa1/BBB+ attractive long)
Most Sold Sector: Big 6 Banks
Goldman Sachs (GS A2/BBB+ attractive short)
Morgan Stanley (MS A1/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 149 undervalued bonds ($224 billion market value), with 55 long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,421 bonds ($2.3 trillion) are overvalued per the stochastic credit trading model, with 634 short trade indicators.
U.S. Big 6 Banks (all Ratings): 304 bonds ($756 billion) overvalued, with 76 short indicators.
Single A and BB Energy: 94 bonds ($140 billion) overvalued, with 51 short indicators.
Single A Healthcare: 114 bonds ($166.6 billion) overvalued, with 74 short indicators.
Single A Industrials: 96 bonds ($105.1 billion) overvalued, with 53 short indicators.
G-255 Issuer News
Late Friday S&P lowered the France's Credit rating from AA- to A+. French USD bank bonds BNP (BNP), Credit Agricole (ACAFP), Societe' Generale (SOCGEN) and BPCE (BPCE group) all currently carry long credit trade indicators were unchanged to +2bp wider on Friday.
U.S. IG Credit Valuation and Spreads
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 40% of the widening observed from November 12, 2024, to April 10, 2025.
Model Valuation: IG and HY markets show overvaluation. Post earnings announcements from 19 of the world's 255 largest issuers of corporate debt record 140 are increasing leverage.
2025 10-Year Credit Spreads
Year-over-Year (YoY): are wider compared to last year.
Year-to-Date (YTD): are wider YTD.
UST 10-Year Rates: -17 bp YoY and -55 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
U.S. equities and credit markets diverged for the fourth time in five days on Friday. Over the past 26 trading days, U.S. equities and high-yield (HY) and investment-grade (IG) credit spreads have moved in opposite directions 10 times. The historical 80% directional correlation between U.S. equity prices and credit spreads has weakened significantly in 2025, driven by shifts in sector weightings within U.S. equity and bond indices and the growing presence of non-U.S. (Yankee) issuers in bond indices.
Despite the ongoing U.S. government shutdown, corporate credit spreads continue to tighten, bolstered by constrained new bond issuance. Historically, U.S. equities tend to rally following government shutdowns. However, the introduction of trade tariffs is increasingly unlikely to stimulate new demand in the U.S. corporate bond market.
New USD G-255 supply and fund flow data
Morgan Stanley (MS) became the third Big 6 bank to issue bonds following its earnings report. Alongside JPMorgan (JPM) and Goldman Sachs (GS), these banks brought 11 bonds to market, totaling $23 billion, within a one-week period.
Despite the attractive pricing of the Morgan Stanley bonds and the performance of other new Big 6 bond issuances last week, the U.S. corporate bond market showed limited receptivity. Notably, only JPMorgan has returned to the market twice since May.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 635, -61 from Friday +27% above the 200 day moving average of all model short trading recommendations.
Attractive Long indicators 54, -2 from Friday.
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 65% long position threshold is reached.
Current Status: Do add new supply trades where issuer is de-levering; add new issue bonds where spreads widened by +2 basis points.
Current Status of trading indicators below:
Last week 1 long trade reached its avoid trading level.
Systematic Credit Trading Strategy October 20, 2025
Closed Positions: Last week Broadcom (A3/A-) AVGO 4.8 02/15/36 added +5 bp behind new issue spread reached its reached its avoid trading level.
Enter New Longs: Last week the trading model did not add any new long indicators.
3. Enter New Short trades: 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 65% 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 63.6%
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: None
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – October 17, 2025)
Performance Summary: Total Trades: 172 (1% of total trades).
Long Indicators: 121/135 reached avoid-trading levels, tightening by -9.28 bp.
Short Indicators: 29/37 reached avoid-trading levels, widening by +5.62 bp.
Remaining Longs: 14 widened by +3.8 bp.
Remaining Shorts: 8 tightened by -10.47 bp.
Average Spread Movement: ±6.67 bp in the indicated direction.
Success Rate: 87% of indicators reached avoid-trading levels, which is slightly below normal.
Average trade holding period: (20.1 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.