Systematic Credit and Equity G-255 Trading Indicators for September 25, 2025
Good Morning! Risk indicators weakened further on Wednesday and remained stable overnight, driven by headlines surrounding the fourth auto-related bankruptcy in the past three months, First Brands. Although First Brands has $6 billion in total debt outstanding and is not part of the systematic trading universe, this marks the second bankruptcy in September, following Tri Color Auto Finance's filing two weeks ago.
According to S&P, U.S. corporate bankruptcies are at their highest pace since 2010, reaching 11.5% compared to 2024.
Meanwhile, major U.S. and European banks are forecasting significant improvements in Q3 results, driven by increased profitability in capital markets trading and mergers and acquisitions.
Credit Market Model Indicator: Priced to perfection (not redundant)
As our trading model indicators hit a 2025 high in terms of net short credit on Tuesday, credit spreads widened again by roughly 2 bp. The systematic trading model indicators changed overnight. First, the level of long/short trades has moved to 62% long (with 20% in floating-rate notes) and 38% short post-Wednesday's ETF corporate bond flows. At the same time, the model's most attractive long indicators are from recent new issues that are trading outside of NIP. As of yesterday, trading model indicators still view G-255 equities as overvalued and have not provided an overall credit indicator of "short only." We note that last Friday, the trading model's credit indicator was initially +5 to 10 bp wider over the next 5–10 trading days. Our calculations show spreads are +3.4 bp wider since last Friday.
UST: Not yet overvalued
Yields remain higher across the UST curve (despite 100 bp of U.S. Federal Reserve overnight rates) year over year. Hence, our trading model still does not see USTs as overvalued.
US Financial Issuers
While U.S. banks are considered the most overvalued sector in our trading universe, the majority of U.S. banks report results in less than 30 calendar days. Given that balance sheet disposition can change significantly depending on securities holdings, the systematic trading model avoids adding risk to issuer positions within 30 days of earnings reports.
US Home Sales In August.
New home sales surged 20.5% in August, after falling 1.8% in July. The median sales price rose to $413,500—a 1.9% year-over-year increase. Hence, credit is growing in housing and tightening in autos.
Trading Model Indicators and Strategy for Thursday
Our systematic trading model indicates USD high-yield (HY) and investment-grade (IG) credit as overvalued. Inflows into non-USD funds are growing, though at a slower pace. Post-Wednesday trading, 7-year credit remains the most attractive maturity sector.
Today's Systematic Trading Sector Indicators
Top 3 Short-Indicated Sectors:
Big 6 Senior Bank Holdco (USD only)
USD Single A Healthcare (USD only)
Single A Industrials (all currencies)
Top 3 Long-Indicated Sectors:
U.S. Regional Banks (USD)
U.S. BBB/BB TMT (USD and EUR)
U.K. Banks (all currencies)
USD Systematic Trading Model
This morning's model indicators continue to suggest U.S. credit is overvalued, with the most likely trading scenario being wider spreads over the next 2–7 trading days.
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 167 long/short trades in 2025 (marked via TRACE), 90% 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.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
Volume: +25% above average.
G-255 Issuers: 100 of the top 100 traded issuer bonds accounted for 100% of top 100 issuer volume and 76% of total TRACE volume.
High-Yield (HY) Trading
Volume: 7% above average.
G-255 Issuers: 15 of the top 25 traded bonds accounted for 57% of top 25 issuer volume and 60% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: +0.20 bp at 47.75 bp.
U.S. IG Cash Spreads: (+2bp) wider with Utilities and Financial Perps underperforming a second day.
CDX HY Index: -.1bp @ 107.8 (per Bloomberg).
HY Cash Bonds: Unchanged with BB TMT outperforming.
High-Yield Activity
• Dealers bought $1 billion in HY bonds on Wednesday.
Most Bought HY Bonds: Charter Communications (CHTR Ba/BBB-)
Most Sold HY Bonds: Weatherford International (WFRD Ba3/BB)
Investment Grade Activity
Dealers bought $2.2 billion of IG bonds on Wednesday.
Most Bought Sector: Single A Healthcare
Eli Lily (LLY, Aa3/A+ attractive short)
Merck (MRK Aa3/A+ attractive long)
Most Sold Sector: Electric Utilities
Enel (ENELIM Baa1/BBB+ attractive long)
Georgia Power (SO A3/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: The stochastic credit trading model identifies 103 undervalued bonds ($103 billion), with 25
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,578 bonds ($2.43 trillion) are overvalued per the stochastic credit trading model, with 1079 short trade indicators.
U.S. Big 6 Banks (All Ratings): 302 bonds ($753.8 billion) overvalued, with 213 short indicators.
Single A and BB Energy: 107 bonds ($173.4 billion) overvalued, with 71 short indicators.
Single A Healthcare: 119 bonds ($172 billion) overvalued, with 99 short indicators.
Single A Industrials: 111 bonds ($125.6 billion) overvalued, with 73 short indicators.
G-255 Issuer News
Intel Corp. has approached Apple Inc. about securing an investment as part of efforts to bolster a business that's now 9.9% owned by the US government.
Intel (INTC Baa2/BBB) corporate bonds and equity are both carry short trade indicators
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 38% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation
The systematic credit trading indicator (Investment Grade and High Yield) shows overvaluation. A record 140 of the world's 255 largest corporate debt issuers, the highest in the 34-year history of the trading model, are increasing leverage on their balance sheets.
2025 10-Year Credit Spreads
Year-over-Year (YoY): 10-year credit spreads are slightly wider compared to last year.
Year-to-Date (YTD): Spreads are wider YTD.
UST 10-Year Rates: Up 36 basis points (bp) YoY but down -43 bp YTD.
Global Equity Correlation to IG Credit Spreads
U.S. equities correlated directionally with U.S. equity price movements for the ninth trading day in the last eleven. We are now in a quiet period for earnings reports, and U.S. equities are at all-time highs. U.S. corporate debt valuations outside of 7 years are not near all-time tights. In 2025, USD 10-year credit and equity prices have correlated on 145 out of 195 trading days, well below the historical norm over the past 33 years. While there is an 80% historical correlation between U.S. equity prices and 10-year U.S. corporate credit spreads, recent geopolitical headlines and U.S. currency fluctuations have led to a decoupling of these two risk markets.
New USD G-255 supply and fund flow data
On Wednesday, the two G-255 deals we have been writing about came to market:
Oracle (ORCL Baa2/BBB) came to market, selling 6 issues totaling $18 billion as the second-largest transaction (Mars as the largest) of 2025. Our trading model prices new supply based on a 95% probability of each new bond tightening by a minimum of (-5 bp) within a 22-day trading period. Given the overall credit reading of 1,177 of 6,000 bonds ($1.8 trillion) carrying a short trade indicator and just 19 secondary bonds generating a long trade indicator, the overall credit model indicator was that credit would widen on Wednesday. The model indicator was to avoid new supply on Wednesday as a result.
Nissan (NSANY Ba2/BB) sold $2 billion of 3- and 5-year paper at levels where the trading indicator showed the probability of -5 bp of tightening within 22 trading days over 95%.
Net inflows to ETFs totaled $6.71 billion in the week ended Sept. 23, 2025, including the effect of leveraged funds, compared with $7.71 billion the prior week.
Overall investment-grade corporate inflows fell $1.1 billion to $781 million.
High-yield corporate inflows fell by $430 million to approximately -$100 million of outflow.
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Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 1079, -98 from Wednesday +95% above the 200 day moving average of all model short trading recommendations.
Attractive long indicators: 19, +6 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 5-year maturities.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.
Replace Longs: Replace long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 67% long position hurdle is reached.
Current Status of trading indicators below:
This 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 24, 2025
Closed Positions: On Wednesday trading indicator for Honeywell (A2/A) HON 4 ½ 1/15/34 reached its reached its avoid trading level .
Enter New Longs: On Monday the trading model indicator for new issue Broadcom AVGO 4.8 02/15/36 and on Tuesday new issue Lowe's (Baa1/BBB+) LOW 4 ½ 10/13/32 indicators were added to the long/short basket trade. Trading model indicators now show new issue as unattractive at current trading levels.
3. Enter New Short trades: On Monday the trading model indicator added the General Motors GM 5.45 09/06/34 on Tuesday United Healthcare (Baa2/BBB) UNH 3.05 05/15/41 and on Wednesday the s added to the John Deere Credit (A1/A) DE 5.45 01/16/35 to the long/short model basket trade. 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 70% 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 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 Wednesday: Honeywell (A2/A) HON 4 ½ 01/15/34 reached its avoid trading level. The model adds trading model short trade indicator John Deere Credit (A1/A) DE 5.45 01/16/35
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 24, 2025)
Total Trades: 167 (1% of total trades).
Performance Summary:
Long Indicators: 119/134 reached avoid-trading levels, tightening by -9.34 bp.
Short Indicators: 27/34 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 13 tightened -.1 bp.
Remaining Shorts: 8 tightened by -12.32 bp.
Average Spread Movement: ±6.96 bp in the recommended direction.
Success Rate: 91% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (19.8 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.