Systematic Credit and Equity G-255 Trading Indicators for September 4, 2025
Good Morning
We saw slight recovery Wednesday's risk trading as the S&P 500 and Nasdaq Composite rallied, while the Dow Jones Industrial Average (DJIA) lagged, reflecting ongoing geopolitical pressures. Both investment-grade and high-yield bonds saw improved spreads and prices, marking the first positive trading day in seven. The DJIA's underperformance is notable, driven by geopolitical headlines impacting market sentiment.
On Tuesday, the systematic trading model identified 34 out of 37 new bonds with attractive long indicators. By Wednesday, 30 of these bonds traded higher or tighter. Three bonds—Cigna (CI), Merck (MRK) 7-year bonds, and HSBC (HSBC) subordinated 11NC10 bonds—traded within 1 basis point of the avoid trading model indicators.
Geopolitical and Capital Flow Dynamics
With U.S. tariffs temporarily on hold following a recent U.S. Appellate Court ruling, third-quarter earnings face significant accounting challenges, particularly for companies using LIFO (Last In, First Out) inventory accounting. The ruling affects tariff-related pricing adjustments, with an estimated 132 companies in retail, consumer, utility, and auto sectors facing substantial gross and operating profit adjustments. The DJIA is more exposed to these LIFO-related impacts than the S&P 500, while the Nasdaq is the least affected.
Geopolitical headlines continue to drive market uncertainty, with the U.S. administration's efforts to:
Gain control over the Federal Reserve,
Overhaul the U.S. healthcare system, and
Deploy military force in local markets.
These developments have spurred significant capital outflows from U.S. markets, with non-U.S. funds and entities seeing increased inflows as investors seek to mitigate geopolitical risks. As of Wednesday, these outflows surpassed the value of tariff collections, signaling a shift in non - US investor confidence away from U.S. securities.
Central Bank Policy and Borrowing Costs
While there are many headlines relating to Friday's US non – farm payroll numbers as we wrote yesterday, over the past 12 months, 7 central banks across seven regions have implemented 24 overnight interest rate cuts averaging over 100 basis points. These cuts have reduced 2-year government bond yields by 30 to 80 basis points. However, public borrowing costs for 5- to 10-year government bonds have risen significantly, indicating that central bank rate cuts have not effectively lowered longer-term borrowing costs. This disconnect could exacerbate fiscal pressures amid ongoing geopolitical and economic uncertainties.
Single TMT Sector Issuer Indicators
(1) 15 of the 17 USD Single A rated TMT issuer have publicly traded debt around the world. In total there are almost $700 billion bonds for these issuer s globally.
(2) However, $500 billion of the $700 billion outstanding is in USD.
(3) Single A TMT is the largest differentiator in USD corporate bond indices and those around the world.
(4) Only 7 of the 17 Single Generate enough cash to cover shareholder payments. 10 are de-levering and 7 are re-levering.
(5) 3 issuer equities have short trade indicators. But none trade above their 200 day moving average.
(6) Just Cisco (CSCO) and Visa (V) US equities have attractive long trading indicators this Morning.
The model continues to indicate slight overvaluation, with attractive longs 29% below the 200-day moving average and attractive shorts 31% above it. Recent spread widening in subordinated US bank bonds and Single A-rated industrial bonds prompted two additional changes in the model's sector trading indicators overnight.
Today's Systematic Trading Sector Indicators
Big 6 Senior Bank Holdco (USD only)
USD Single A Healthcare sector (USD only)
European Single A and BB Energy (all currencies)
Are the top 3 short indicated sectors.
UK Banks (all currencies)
US BBB TMT (USD and EUR)
French Banks (all currencies)
Are the top 3 long indicated sectors.
USD Systematic Trading Model:
This morning's model indicators continue to indicate US credit will tighten or rise in the near term. This despite 6 successive credit declining trade days prior to Wednesday.
Trading Allocation Strategy
50% Long: Undervalued, deleveraging bonds.
30% Short: Overvalued bonds in re-levering sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance
Of 151 long/short trades in 2025 (marked via TRACE), 91% achieved ±5 bp targets, averaging ±7.27 bp per trade. Between June 30 and August 25, 2025, 27 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Last week saw strong inflows into US corporate bond ETFs and mutual funds for investment-grade bonds.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, complying with global regulatory requirements for material events.
US Economic Indicators / Inflation and Interest rate outlook
The number of job openings was little changed at 7.2 million in July, the U.S. Bureau of Labor Statistics
reported. Over the month, both hires and total separations were unchanged at 5.3 million. Within
separations, both quits (3.2 million) and layoffs and discharges (1.8 million) were unchanged.
Factory orders fell -1.3% in July vs -4.8% in June
New orders ex-trans rose 0.6% in July after +0.4% in June
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +30% above average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 71% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +10% above average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 58% of top 25 issuer volume and 63% of total TRACE volume.
Market Movement
U.S. CDX Index: -.3 @ 50.9bp
U.S. IG Cash Spreads: tighter for a first day in 7 (-1 to -3bp) with TMT outperforming
CDX HY Index: unchanged @ 107.2 (per Bloomberg).
HY Cash Bonds: Were higher Wednesday with HY Industrials and Healthcare outperforming.
High-Yield Activity
- Dealers sold $900mm of HY bonds Wednesday.
Most Bought HY Bonds
- Transdigm (TDG Ba3/BB- attractive short)
Most Sold HY Bonds
- CHS Community Health (CYH Caa3/CCC- attractive long)
Investment-Grade Activity
- Dealers sold $200 million of IG bonds Wednesday.
Most Bought Sector: BBB TMT
- Fiserv (FI Baa2/BBB attractive short)
- Verizon (VZ Baa1/BBB+ attractive long)
Most Sold Sector: Healthcare
- Merck new issue (MRK Aa3/A1 attractive long)
- Cigna new issue (CI, Baa1/A- attractive long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, Single A rated global Autos, BBB TMT, BBB Energy, and Euro Yankee Banks. Overall model indicators 215 bonds ($316 billion) are considered undervalued by the stochastic credit trading model, with attractive 79 long trade indicators for the entire 6,000 USD bond universe.
Short Opportunities
1458 bonds ($1.19 trillion) are considered overvalued by the stochastic credit trading model with 644
short trade indicators (-276 WoW).
U.S. Big 6 Banks (All Ratings): $731 billion in overvalued market capital across 292 bonds, with 108 short indicators.
Single A and BB Energy $167.4 billion in overvalued market capital across 102 bonds, with 61 short indicators.
Single A Healthcare $161.4 billion in overvalued market capital across 113 bonds, with 60 short indicators.
Issuer News
Shell Corp (RDSALN Aa2/A+)
Shell Plc has shelved its biofuels plant in the Netherlands as it continues to shed low-carbon businesses to boost profitability. The project in Rotterdam, which was put on hold last year pending a cost review, was to have been one of Europe's biggest plants for renewable diesel and sustainable aviation fuel.
RDSALN credit has a long trading indicator, SHELL equity has a long indicator.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 29% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: Our systematic credit trading indicator (IG and HY) remains slightly overvalued. 140, (the most in the 34 year history of the trading model) of the world's 255 largest issuers of corporate debt, are adding leverage to their balance sheets.
2025 10Y credit spreads: are unchanged YoY and wider YTD.
UST 10Y rates are +46 bp higher YoY and -35 bp YTD
Global Equity Correlation to IG Credit Spreads
USD credit and US equities both improved slightly Wednesday. It was the 4th trading day in the last 7 where US credit and equity risk direction correlated. 10Y credit and equity prices have correlated 135 out of 178 trading days in 2025. This is well below normal over the past 33 years. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.
New USD G-255 supply and fund flow data
On Wednesday, six issuers within the G-255 universe sold ten bonds totaling $6.65 billion in new supply. Petrobras (PETBRA, Ba1/BB) was the only issuer with a market capital of $1 billion or more. Only five of the ten bonds carried an attractive long trade indicator. Four bonds were issued in USD and classified as either perpetual (Perp) or non-investment grade. Notably, only the Bank of New York (BK, Baa1/BBB+) bond had an attractive long indicator.
Key ETF Inflow Data:
Total net inflows: $7.24 billion (down from $9.99 billion the prior week, including leveraged funds).
Broad bond-market ETFs: Dropped by $1.4 billion to $2.72 billion.
Municipal market bond ETFs: Dropped by $748.8 million to $565.9 million.
Year-to-date net inflows: $251.9 billion.
Largest inflow: iShares iBoxx $ Investment Grade Corporate Bond ETF with $1.06 billion.
Largest outflow: iShares 1-5 Year Investment Grade Corporate Bond ETF with $240.9 million.
Additional Inflow Trends:
Corporate bond inflows: Decreased by $92 million to $1.56 billion.
Overall investment grade inflows: Fell by $1.966 billion to $7.052 billion.
Domestic inflows: Declined by $2.852 billion to $5.118 billion.
International inflows: Increased by $47 million to $1.612 billion.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 644, +52 from Wednesday. The systematic credit market indicator now slightly overvalued. The number of short indicators = (+33%) than the 200 day moving average.
Attractive long indicators: 79, -16 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-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 70% long position hurdle is reached.
Current Status of trading indicators below:
During the last week of July through the 4th week of August, 25 long trades reached their avoid trading levels and were replaced by 11 new issue and new short trade indicators.
Systematic Credit Trading Strategy September 3, 2025
Closed Positions: last week, the long/short basket trade exited 1 new issue trade.
Enter New Longs: On Wednesday, the model indicator added The new Cigna (Baa1/A-) CI 4 7/8 09/15/32 and on Thursday added the new Toyota (A1/A-) TOYOTA 4.65 9/03/32 both issued on Tuesday and having the preferred 7Y maturity based on model indicators.
3. Enter New Short trades: The trading model indicators show adding at least 2 more new issue trades prior to adding any short trades.
4. Monitor Trade Position (Portfolio) 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 67%
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
Thursday Trading Indicator: The new Toyota (A1/A-) TOYOTA 4.65 9/03/32 issued on Tuesday and having the preferred 7Y maturity based on model indicators.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 3, 2025)
Total Trades: 151 (1% of total trades).
Performance Summary:
Long Indicators: 110/118 reached avoid-trading levels, tightening by -9.53 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 9 widened by +3.06 bp.
Remaining Shorts: 5 tightened by -13.71 bp.
Average Spread Movement: ±7.29 bp in the indicated direction.
Success Rate: 91% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.45 trading days) normal.
Hewlett Packard Enterprises Results from Wednesday
Hewlett Packard Enterprises (HPE, Baa2/BBB, attractive short debt attractive long equity) Earnings Summary: Hewlett Packard Enterprises reported 3Q revenue that rose 19% YoY and operating earnings that fell -60% YoY.
3Q Revenue Run Rate rose 77% YoY.
3Q Gross margin fell -240bp YoY and rose +80bp QoQ.
3Q Server revenue rose 16% YoY.
3Q Hybrid Croup revenue rose 12% YoY.
Financial Position:
• 3Q cash from operations rose 11% YoY to $1.305 billion.
• 3Q free cash flow rose 15% YoY to $790mm.
Company did use balance sheet to repurchase equity and pay dividends in the first 9mos 2025.
Trading Model Indicator: 13 HPE secondary bonds in circulation have a market capitalization of $750 million or more. 8 HPE systematic trading model indicators are overvalued, and 1 bond HPE 4.4 09/25/27 has a short trade indicator.
Equity Indicator: HPE US is attractive at $20.18 per share.
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.