Systematic Credit and Equity G-255 Trading Indicators for June 27, 2025
Note: the long term market balance is to the short side. See the averages table. Consider this as the true balance point.
US equities outperformed credit directionally for only the 6th time in 41 trading days on Thursday. The S&P 500 is trading within 10 points of its all-time high and at 10x 2025 expected earnings. US credit, which partly reduces volatility in major equity index components through bond issuance for share repurchasing and dividend growth, has widened both year-over-year and year-to-date.
The High Yield CDX, however, is within 2 points of its December 2024 all-time high.
Thursday marked the 4th consecutive trading day with US broker-dealers purchasing over $2 billion in investment-grade (IG) and high-yield (HY) bonds. Strong retail inflows for both IG and HY prompted another adjustment in our stochastic credit trading model. As expected, the US Federal Reserve proposed easing bank capital requirements, as reported yesterday.
Our trading model relies entirely on stochastic algorithms. However, it's unlikely dealers were "hit" on nearly $10 billion in bonds in the 4 days approaching month- and quarter-end; they are buyers, not sellers. This suggests a contradiction, me providing an "assumption": relaxed capital rules and minimal loan growth are driving trading asset growth, as seen in Q1 2025 US bank data. I'm really conspiracy theorist and have no idea who shot President Kennedy.
Overseas buying continued in large-cap issuers, primarily within our G-255 trading/research universe.
Heading into the month- and quarter-end weekend, model outputs and historical trends indicate a 78% chance US IG credit spreads will tighten from July 1-3, with a 44% chance the High Yield CDX reaches 109 (a record) during that period.
Federal Reserve Updates
Bloomberg reported last night that most Fed Governors are not in favor of a rate cut at the July 30 meeting.
Trading Strategy and Balance Sheet Analysis
Q1 balance sheet analysis of global banks (US Big 6, regional, Canadian, European, French, UK, and single-A/BBB-rated TMT) supports our trading insights. Japanese banks exhibit particularly strong balance sheets. Model outputs indicate:
Long Yankee Banks / Short US Money Center Banks
Long single-A TMT / Short single-A Healthcare
We review sector operating metrics and balance sheets on non-earnings days. Of 125 systematic long/short trades (marked to market by TRACE prints), 80% met their ±6.89 basis point target.
Portfolio Trading Model Indicators
Of over 6,000 bonds tracked, 528 are near 52-week tight or wide spread levels, ~6% above historical averages. The model avoids adding short positions this morning due to strong credit inflows for the week ending June 25. One short trade hit its avoid point on Thursday. The model maintains:
62% long / 18% short strategy
20% front-end allocation, with 67% in floating-rate notes (FRNs) maturing within three years, targeting undervalued, deleveraging bonds
Attractive short indicators are above 2-year averages; attractive long indicators are 36% below average.
Key Trading Issues Thursday
With trading volumes significantly below average and reduced market participation on Thursday, we observed three new G-255 issues. Mizuho Financial (A1/A-, attractive long) led with $6.9 billion in large-cap supply, including three issues of $1 billion or more and a Mizuho 5nc4 $750 million floating-rate note (FRN). This is a notably large print and long duration for an FRN. I am going add another opinion here. I think we all know the FRN will trade well and that has ALL to do with Mizuho FRN trader.
Thursday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading
- Volume: 13% below average.
- G-255 Issuers: Represented 97 of the top 100 traded issuer bonds, accounting for 95% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
- Volume: 12% below average.
- G-255 Issuers: Represented 20 of the top 25 traded bonds, accounting for 73% of top 25 issuer volume and 61% of total TRACE volume.
Market Movement
- U.S. CDX Index: tightened (- 1bp) Thursday @ 52.5 bp.
- U.S. IG Cash Spreads: were (+1 to +2bp) wider and are now wider over the past 7 trading days. Utilities and Autos outperformed while TMT and US financials underperformed.
- CDX HY Index: +.5pt @ 107, per Bloomberg) as HY inflows hit a 2 year high on Wednesday.
- HY Cash Bonds: BB TMT and Healthcare were the best performing bonds. BB financials underperformed.
High-Yield Activity
- Dealers bought $1 billion of HY bonds on Thursday. That is the 8th day in 11 that dealers have bought "Junk" paper.
Most Bought HY Bonds by End Users
- Onemain Finance (OMF, Ba2/BB)
- EchoStar (SATS, Ca1/B attractive short)
Most Sold HY Bonds by End Users
- Delek Finance (DLK, B2/BB-) new issue
- CCO Holdings (CHTR, B1/BB- attractive long).
Investment-Grade Activity
- Dealers net bought $2.2 billion+ of IG bonds on Thursday and are near $9 billion on the week.
Most Bought End-User Bonds
- EOG Resources (EOG, A3/A-) new issue.
- Walmart (WMT Aa2/AA attractive long)
Most Sold Issuer Bonds
- Wells Fargo (WFC A2/BBB+, attractive short)
- Abbvie (ABBV A3/A- attractive short)
Inflation, Economic Data, and Interest Rates
For the week ended June 20 US initial jobless claims rose 3k YoY to 236k.
For the week ended June 13 continuing US jobless claims 1.974mm up 130k YoY
Bloomberg reports that the majority of US Federal Reserve Governors favor holding off on interest rate cuts in July.
UST 10Y is (-31bp) YTD @ 4.26%.
Attractive Trading Sectors
Long Opportunities
Single A TMT $80.5 billion. 45 bonds are considered undervalued by the stochastic credit trading model with 23 attractive long trade indicators.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $709 billion in overvalued market capital across 279 bonds, with 88 short indicators.
BBB TMT: $193.4 billion in overvalued market capital across 116 bonds, with 23 short indicators.
Issuer News
Delta Airlines (DAL, Baa2/BBB-), United Airlines (UAL Ba1/BBB-, American Airlines (AAL, Ba1/BB+) all attractive long: US visitors to Japan surged nearly 30% through May compared to last year, leading to increased flights to Japan from all 3 airlines
BBVA (BBVASM, A3/A attractive long) Executives expect cost savings to continue, though at a slower pace, and are engaging investors to gauge ongoing support for their Sabadell acquisition bid.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 45% of the widening observed from November 12, 2024, to April 10, 2025. However, US credit spreads are now wider over the past 7 trading days.
Valuation: U.S. credit is currently fairly valued.
Global Equity Correlation to IG Credit Spreads
For only the 6th time in 41 trading days, US corporate credit did not track US equity price movements. On Thursday, the S&P 500 rose 0.8%, while US credit remained unchanged. US equities are now offering better risk/reward compared to credit, driven by increased cash returns financed through the corporate debt market.
New Supply, Bond Maturities, and Credit Fund Inflows for June
Thursday marked the third consecutive active day for G-255 USD issuance:
Mizuho Financial (A1/A-) issued $3 billion in 6nc5 (fixed and FRN) and 11nc10 bonds.
Takeda Pharmaceutical (TACHEM, Baa1/BBB+) issued $1.4 billion in 10-year and 30-year bonds.
Williams Companies (WMB, Baa2/BBB+) issued $1.5 billion in 5-year and 10-year bonds.
All issues, except the Takeda 30-year bond, were attractively priced per the systematic credit trading model.
No other G-255 issuer sold bonds in Europe on Thursday. G-255 June new supply remains (-18%) below June 2024 levels on a combined (USD + Euro currencies) basis.
week ended June 25 Fund Flows, compared to a week earlier, according to LSEG Lipper:
Short and intermediate investment-grade bonds: $1.3b inflow vs. $933.9m inflow
High-yield notes: $3.46b inflow vs. $355.5m inflow
Treasuries: $73.6m outflow vs. $733m inflow
US leveraged loans: $306.4m inflow vs. $291.1m inflow
Mortgage-related: $112m inflow vs. $563.9m inflow
Systematic Trading Model Indicators and Strategy
Model Output
451 attractive short indicators: 10 more than Thursday and 5% above the 200 day moving average of attractive short systematic credit trading indicators from our Model.
77 attractive long indicators: +12 from Wednesday. The (+3 to +6bp) credit spread widening in the past 8 trading days has to 25 new attractive systematic long trading indicators. However, attractive longs are still (-36%) below the 200 day moving average. This is more due to re-levering balance sheets than current valuation.
Weekly Trading Strategy (ending July 3) Model output changes slightly until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Add shorts of relevering issuers with the deepest discount from their model avoid point.
Systematic Portfolio Trading Model Indicators: Add 1 short for each 1 long position
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.
Most Recent Systematic long/short trades
Union Pacific (UNP, A3/A-): UNP 5.60% 12/01/2054 and UNP 5.1% 2/20/35 are two 9 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
Barclays (BACR, Baa1/BBB+): BACR 5.785% 2/25/26 is one of 9 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
Yesterday's Mizuho (A1/A-) MIZUHO 4.711 07/08/31 new issue is the next published attractive long systematic long /short basket trade.
The Oracle (A2/BBB+) ORCL 2.95 04/01/30 reached its avoid trading level according to our model Thursday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – June 25, 2025)
Total Trades: 125 (1% of total indicators).
Performance Summary:
Long Indicators: 74/94 reached avoid-trading levels, tightening by -9.72 bp.
Short Indicators: 26/30 reached avoid-trading levels, widening by +5.44 bp.
Remaining Longs: 20 widened by -0.65 bp.
Remaining Shorts: 5 tightened by -2.6 bp.
Average Spread Movement: ±6.70 bp in the indicated direction.
Success Rate: 80% of indicators reached avoid-trading levels (10% below normal).
Notes:
Initial long trades based on TRACE print (or new issue price) at indicators date.
Avoid indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
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.