Systematic Credit and Equity G-250 Trading Indicators for May 13, 2025
Buy America? Not so fast
Good Morning: Today we get fresh inflation data, and we have already learned from Honda that there is still much to be resolved regarding where new investment for global industry will come from and which geographic region will see the investment.
In Europe, we saw another €7 billion of new supply from five of the world's largest issuers of corporate bonds, while just over $16 billion of G-250 was sold in USD. Our point is not that the Euro market is supplanting the USD new-issue corporate bond market. The new capital flowing into Europe for the same issuers of debt that had been tapping the US market more frequently over the past 3–4 years is clearly an impact of global trade headlines and corporate outlooks when earnings are reported. Honda's report was not pleasant. And it will come as no surprise that we will likely see similar reports from John Deere (DE) and FedEx (FDX) before we get 2Q numbers. At that point, the true impact of the White House "negotiations" will be apparent in consumer names such as Coca-Cola (KO), PepsiCo (PEP), and Procter & Gamble (PG), as well as Eli Lilly (LLY), Johnson & Johnson (JNJ), and Delta Air Lines (DAL).
A hopeful headline isn't going to reverse any of the corporate hesitation, job deferrals, or capital decision-making. Trump's term (presumably) ends in January 2029, and the thinking behind large investment decisions extending years beyond his time in the Oval Office is speculative. USD credit did perform yesterday, and it is correlating with US equities. But if this were a horse race, the S&P 500 is a thoroughbred, and LQD is, well, Mr. Ed.
Inflation Readings and Interest Rate Calls
As you know, we are not "Fed watchers." We are "watchers of 'Fed watchers.'" We are amazed at how economists, Fed members auditioning for Jerome Powell's role, strategists, analysts, and, of course, the keepers of all knowledge—Bloomberg commentators—continue to bend factual information as it relates to the shape of the UST curve and the Fed's next move(s). We won't see the true impact of the recent rhetoric on pricing or employment until mid- to late July at the earliest.
The other "change" in the operating approach from the issuers listed above is that the "pricing elasticity curve" I was taught at Kellogg—when you were eating Kellogg's cereal (boy, did that product have price elasticity)—no longer exists. Modern data discovery and operational management have completely changed the retail pricing paradigm. "When in doubt, raise prices." More simply stated, "To hell with pricing elasticity!"
Make no mistake, whether it's the railroad industry, technology, managed care, or the auto industry, raising prices on the marginal unit produced is resulting in better-than-expected earnings and stronger cash flow. How do you get 2 interest cuts over the final 3 Fed meetings of 2025?
We do not expect today's or this week's inflation data to impact the interest rate complex.
Earnings Season
Yesterday's earnings revisions to our credit trading model is providing more focus for future trading strategy.
Earnings season is 75% over. We still have yet to hear from retailers, certain auto companies, and Japanese and Canadian banks. What we have learned is simple: More of the world's largest issuers of corporate debt are adding net debt than paying it off.
Thus far, US banks and global non-financials have added $150 billion of net debt to $8 trillion of total debt ($6.4 trillion of net debt), or at a rate of just under 2.5% QoQ. At the same time, these 159 large global borrowers have paid out $330 billion in dividends and equity repurchases. That's an increase of $50 billion YoY.
This creates an enormous change from the "long only" trading strategy the model has provided the roadmap for over the past 2 months.
Monday's US IG Credit Trading:
USD trading volumes were +10 above normal on Monday despite over $16 billion of G – 250 supply and equities materially higher. Financials were 3 of every 10 bonds traded on Monday with dealers buying another $1.2 billion of IG paper. Monday's new issues were not in the top ten issuers traded.
US CDX was -6.5bp tighter as were cash bonds on Monday. We are told that USD auto bonds were the best traders. However, those bonds are still (+20 to +30bp) wider in 2025.
Attractive Trading Sectors
Attractive Long Trading Sectors: None: US IG credit spreads continued, BBB-rated TMT, BBB-rated healthcare remain the most undervalued sectors, but are no longer "attractive" from a long trading perspective.
Attractive Short Trading Sectors: None. The consumer sector is re-leveraging. Consumer credit spreads are (+6bp) wide of attractive short trading levels. Single A Industrials are (+5bp) wide of their attractive short trading levels. US Big 6 banks are also attractive short trading Indicators (-1 to -3bp) tighter from current trading levels, while Single A-rated Healthcare needs (-6 to -8bp) of credit spread tightening to create attractive short trading Indicators.
For more details on each trading sector or individual secondary trading curve, please reach out.
Issuer News over the Weekend
Alphabet Inc.'s Google is facing at least €12 billion in damage claims from dozens of price comparison websites across the European Union, alleging that Google unfairly diverted their customers.
The civil suits are linked to a 2017 decision by the European Commission to fine Google €2.4 billion for illegally leveraging its search dominance to give its own shopping service an advantage.
Those are very large numbers but would have minimal impact on GOOGL.
U.S. IG Credit Valuation
US investment-grade (IG) credit is now "fairly valued." To be clear, US credit has been "overvalued" according to our trading model for approximately 72% of trading days over the past year.
US credit spreads widened by +75 bp from November 12, 2024, when our trading model generated 1,121 attractive short trading Indicators ($1.903 trillion) to April 10, 2025, when the model produced 828 attractive long Indicators ($1.514 trillion). Since April 10, 2025, US spreads are roughly 25 bp tighter in both BBB and Single-A rated credit.
Global Equity Correlation to IG Credit Spreads
US 10Y credit spreads correlated with equities again on Monday, but we believe the horse race analogy provides perspective on the relative performance of US equities vs. Credit since last November and in particular since late February.
New Supply / Bond Maturities / Credit Fund outflows for May
New G–250 Supply Monday May 12, 2025
New European Supply May 12, 2025: HSBC (HSBC,Baa1/BBB ) T2, UBS Switzerland (UBS, AAA) 5Y Covered, Volkswagen (VW, Baa3, BBB-) PerpNC5.5, Orange (ORAFP, Baa1/BBB+) 4Y Fixed,
Anheuser Inbev (ABIBB, A3/A) 8Y Fixed, 13Y Fixed, 20Y Fixed
€ 7 Bil total from 6 deals.
New US Supply
We saw $15,825mm of Liquid G -250 supply $12,075 mm or 76.3% of the issuance was non – financial.
Since the beginning of earnings season (April 14, 2025) 20 G – 250 issuers have sold 45 deals for €49.95 billion.
At the same time US big 6 banks have raised $41.35 billion in 9 separate USD transactions (21 separate bonds). 31 other G – 250 issuers have raised $75.8 billion in 89 separate offerings.
Systematic Trading Model Indicators – Monday
After 38 trading days and roughly (-20bp) of overall credit tightening, our trading model lost its "long-only" stance across its 6,250-bond, 250-issuer USD large-cap universe.
Systematic Trading Strategy for Tuesday May 13
Time to trim long risk –
Long Positions: Attractive bonds (or new supply) from issuers that have already reported results. However, issue size of above $1 billion is the sole Indicator for fixed coupon bonds. Only Toyota new supply fit the above description from Monday's new supply
Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet. Clearly the model sees the next trades as either new attractive short trading Indicators or sale of attractive long Indicators.
The trading model now recommends either (1) shorting bonds that fit the above trading description OR reduce net long exposure created over the 38 day "long only" period.
Systematic Credit Indicators
Systematic credit trading employs defined back-tested trading processes and portfolio construction algorithms based on issuer reported and market trading parameters. This clarity differentiates them from discretionary approaches, offering replicable and auditable methods. We target ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.
Most Recent Model Trading Indicators
We noted new HSBC (HSBC,A3/A-) new USD HSBC 5.24 05/13/31 and the HSBC 5.79 05/13/36 and UK banks as the most attractive long trading sector but did not perform at all on Friday. That changed on Yesterday.
The Bank of America (BAC, A3/BBB) Subordinated 5.518 10/25/35, Capital One (COF, Baa1/BBB+) 6.183 01/30/36, Barclays (BACR, Baa1/BBB) 5.785 02/25/36 and BACR 5.367 02/25/31, Broadcom (AVGO, Baa1/BBB) 5.2 04/15/32 and Crédit Agricole (ACAFP A3/A-) 5.23 01/09/29 all reached their avoid trading level on Monday
Today the model adds TOYOTA, (A1/A) 4 1/2 05/14/27 and TOYOTA 4.8 05/15/30 from yesterday's new supply. Toyota is de-levering.
Monday Sample Trading Indicator Credit Spread Movement
Since February 24, we've published 42 secondary and new-issue trading indicators from our model:
• 19 indicators have reached their avoid-trading level and tightened by (-9.9bp) on average
• The remaining 23 indicators, credit spreads have tightened by (-3.73bp) on average.
• Across all 42 indicators, credit spreads are (-9.13bp) tighter.
Prior long/short trading Indicators
Of the 46 new-issue and secondary trading indicators published (22 long and 24 short) that reached their avoid trading level, the average credit spread movement was (+/-5.6bp).
Of the 10 long indicators issued before February 22 that haven't yet hit the avoid-trading threshold:
• Four are BBB-rated and have widened by +18 bp on average since being indicated.
• They currently trade at 143 bp over the UST curve, with an 8.1-year duration.
• Our model projects an average spread tightening of -23.3 bp remaining.
• Six are single-A rated and have widened by +11.8 bp since being indicated.
• They now trade at 104.2 bp over the UST curve, with a 10.7-year duration.
• The trading model indicates an average spread tightening of -17 bp remains.
Earnings reports from this morning, yesterday and last week
Enbridge (ENBCN, Baa1/A-)
• Higher mainline utilization, higher pricing, and recent acquisitions led to a 67% increase in 1Q Enbridge revenue and a 75% increase in reported earnings. However, operating Enbridge cash flow was flat YoY.
• Financial Position: Enbridge (ENBCN) balance sheet continues to add debt due to acquisitions. The company has almost C$100 billion of total debt, making the ENBCN secondary trading curve one of the largest energy issuers in the world.
• Model Trading Indicators: Of the 26 Senior and Subordinated Enbridge (ENBCN) USD secondary bonds, the credit trading model sees the ENBCN 3 1/8 11/15/29 and ENBCN 5.7 03/08/33 as the most attractive short trading indicators. The model does not see ENBCN equity as attractive at last night's closing price.
Honda (HNDA, A3/A-)
• Honda reported a disappointing 4Q with a substantial operating loss (before financial income) that was well below expectations. Management projects a ¥250 billion or -67% decline in 2026 profit. Projections are for roughly a (-5%) decline in units sold next year.
• Financial Position: The company was very cash flow negative in FY2025 after spending over ¥1 trillion on share repurchases and dividends for the year. Financial leverage is rising rapidly on the Honda balance sheet.
• Model Trading Indicators: Our trading model sees only 3 of 49 Honda secondary bonds as potential attractive short trading indicator candidates. All have over $750 million of market cap. However, all 3 bonds mature within 27 months. The model does not see 7267 JT as an attractive short trading indicators at its current price this morning.
Edison International (EIX, Baa2/BBB)
• EIX reported strong 10-Q operating results and outlined 5% - 7% growth on a going-forward basis. The company also spent considerable time explaining potential losses associated with the Eaton wildfire and believes losses from that event will be "material."
• Financial Position: Net debt on the EIX balance sheet continues to grow faster than revenue (+8% YoY).
• Model Trading Indicators: At current credit spreads, none of the 44 EIX secondary bonds are within (-20bp) of being an attractive short trading indicator. Our trading model does not see EIX equity as an attractive long indicator at present.
McDonald's (MCD, Baa1/BBB+)
• McDonald's filed their first quarter 10-Q. Given that comparable store sales were some of the worst in 5 years, operating cash flow was essentially flat YoY. After capex and reduced payouts (-$400 million), MCD was cash flow breakeven in the quarter.
• Financial Position: MCD total debt remains roughly flat over the past 3 quarters at $38 billion, but net debt is still up +$1 billion YoY.
• Model Trading Indicators: MCD has 26 liquid USD secondary bonds, and our trading model sees 7 of them as overvalued, but none are considered an attractive short trading indicator at current trading levels. The trading model does not see MCD equity as attractive from a long perspective at Monday's closing price.
UniCredit SpA (UCGIM, Baa3/BBB SNP)
• UniCredit reported its best 1Q result in its history and showed a 16.1% CET1 equity ratio. NIM rose with asset quality. The company raised 2025 earnings guidance due to trading profit around the world. UCGIM continues to negotiate with the Italian government on the purchase of BPM Italy.
• Financial Position: UniCredit has more cash than debt, one of the highest CET1 capital ratios in Europe, and actually retains capital after payouts to shareholders.
• Model Trading Indicators: UCGIM only has 7 USD-denominated secondary bonds in circulation. All of them are considered undervalued. Three of them are non-investment grade (Ba1/BBB-) and subordinated. Our trading model sees all three Subordinated UCGIM bonds—UCGIM 5.861 06/19/32, UCGIM 7.296 04/02/34, and UCGIM 5.459 06/30/35—as attractive at current trading levels. With UCGIM equity now trading at an all-time high, the model does not see the stock as attractive.
Macquarie Group Ltd (MQGAU, A1/BBB+)
• Macquarie reported 2H 2025 net profit that rose 5.5% YoY and full-year profit that grew 6.8% on significantly higher lending rates. At the same time, Macquarie's excess capital fell by (-15%) vs. 2024 as MQGAU raised their dividend by 15%.
• Financial Position: Macquarie has used the US market to raise capital to lend in Australia, as deposits only represent roughly two-thirds of loans. The issuer is again re-levering its balance sheet to pay shareholders and expand its lending and capital markets base.
• Model Trading Indicators: With over $50 billion of USD borrowings, there are 19 liquid Macquarie secondary USD-denominated bonds in circulation. However, only 2 of those bonds are considered overvalued at current spreads. None are attractive short trading Indicators. Our trading model does not see the MQGAU equity as attractive at its current price.
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.