Systematic Credit and Equity G-250 Trading Indicators for May 16, 2025

The Data "Says"

Good Morning: First, another correction: the Sumitomo Financial Group (SUMIBK) Senior Non–Preferred credit rating is A1/A-, not Baa2/BBB+. For reasons that will become evident in the earnings section of today's trading model output report, correcting that mistake is important.

Second, we saw more projections yesterday and last night from Walmart (WMT), Mitsubishi UFJ (MUFG), Mizuho (MIZUHO), Siemens (SIEGR), and John Deere (DE).

Inflation Readings and Interest Rate Calls

When we add in the survey data and actual reported PPI data, we saw a US risk market that is still flush with domestic cash, pushing the US interest complex back to the "2 Fed Rate Cuts" before the end of the year. We aren't going to go through comments from Walmart (WMT) or from Fed speakers about inflation. We only focus on 2 dynamics:

(1) April 2025 CPI and PPI inflation data combined with Thursday's initial jobless claims data moved the US 10Y (-10bp) lower and just +25 bp to the current Fed overnight rate. On the flip side, the Philadelphia Fed May Prices Received (43.6) and Prices Paid (59.8) were 12-month high levels for the 2 components combined.

(2) The Fed has 2 meetings in the next 5 months (June 18 and July 30). Unless the PPI and CPI data we saw for April continue into May and June readings AND initial jobless claims (which correlate strongest to the US reported unemployment rate) rise, historically speaking, the inflation and employment data would not support a Fed rate cut. That would leave 3 more meetings for 2 rate cuts.

So, to reformulate the headlines and the current UST curve, the risk markets are betting that May and June inflation reports mirror April's and that unemployment will rise by 0.2% over the next 2 months.

And it's the performance of the UST 10Y that, combined with added leverage on US issuer balance sheets, is inhibiting the performance of US IG credit spreads.

Earnings Season

No need for charts this morning (we will have them with more dividend data on Monday).

213 of 230 issuers that will report interim results for the March–June period (which have issued $15 billion of hard currency debt, $22 trillion overall) have provided their income statement and balance sheet data.

The reasonable conclusions from these reports are:

(1) The strongest balance sheets in the world are the UK and Japanese banks. They also took a different tack in 1Q as to asset deployment and risk management. In total, 32 non-US financial issuers added $358 billion of liquidity.

(2) Conversely, 20 US banks added $130 billion in net debt. This change comes largely as cash and UST assets were moved to trading desks. Loan growth at US banks was only 1% YoY in 1Q 2025.

(3) Global non-financial issuers (153) added $101 billion of net debt and have paid (thus far) $463 billion in dividends and share repurchases (+13.6% YoY) while revenue grew +6.3% YoY. Year over year, these 153 issuers have added $260 billion of net debt. As to the sector releveraging the most? We provide that information below.

Thursday's US IG Credit Trading:

USD trading volumes were +15% above normal for the first time in 2 weeks. United Healthcare (UNH), HSBC (HSBC), Truist Financial (TFC), and SocGen (SOCGEN) new supply were among the top 15 traders. End users bought over $1.4 billion of US IG paper, and the bulk of those purchases were single-A rated.

US CDX tightened by -1bp to 55, and US IG cash was again unchanged as US interest rates rallied. Consumer discretionary (autos) and utilities were the best-performing sectors, while healthcare bonds were wider.

Attractive trading sectors

Attractive Long Trading Sectors: None: As attractive as deleveraging IG credit issuer credit spreads were on April 10 of this year, only BBB-rated TMT and BBB-rated Yankee Euro banks have 10 or more bonds that are considered attractive long indicators by our trading model.

Attractive Short Trading Sectors: US Big 6 banks, Australian banks, BBB TMT, single-A energy, BBB energy, and both single-A and BBB consumer all have at least 10 attractive short trading indicators at Thursday's closing levels.

For more details on each trading sector or individual secondary trading curve, please reach out.

Issuer News Thursday

United Healthcare (UNH) fell another 14% Thursday following a report from The Wall Street Journal that said the Justice Department was investigating the company for possible Medicare fraud. The investigation has been active since at least last summer. United Healthcare (UNH) equity is down (-29%) in the past 5 trading days.

CVS Health Corp. (CVS) is bidding to buy stores and patient data from Rite Aid Corp., which is going out of business after filing for bankruptcy a second time.

Meta Platforms (META): The Federal Trade Commission has wrapped up its case against Meta Platforms Inc., arguing that the company is an illegal social-media monopoly and should spin off Instagram and WhatsApp. Meta will present its defense, arguing that the FTC's market definition is too narrow and excludes competitors like TikTok, YouTube, and iMessage, and that the government has failed to prove any harm to users.

Charter Communications (CHTR) is in advanced talks to combine with Cox Communications in a deal that would value Cox at over $30 billion, including

U.S. IG Credit Valuation

US investment-grade (IG) credit remains "Slightly overvalued" which is far cheaper than where US IG credit has traded over the past 2 years .

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 +22 bp tighter in both BBB and single-A rated credit.

Systematic trading captures volatility trading points and produces significantly higher reward/risk results metrics in an automated analytic and trading process. By adding long and short trades incrementally as the model output recommends daily and exiting trades at the model avoid points, much of the credit market volatility and exposure is limited.

Global Equity Correlation to IG Credit Spreads

Today, we note one bond that has not correlated to its equity price. John Deere (DE), which has recorded negative earnings growth and lowered its earnings outlook for most of the past year and a half, is trading at an all-time high price of $516.32 (28x 2025 earnings) and is up 33% YoY. The Deere (A1/A) DE 5.1 04/11/34, issued @ 70/10Y a year ago, is unchanged in credit spread.

Explanation? John Deere (DE) continues to raise its dividend and repurchase equity despite declining earnings and a releveraging balance sheet.

New Supply / Bond Maturities / Credit Fund outflows for May

Just 1 G – 250 new issue on Thursday, the Truist Bank and Truist Financial – both deals were anticipated and priced attractively.

We saw 5 G-250 deals from the UK and Europe on Thursday which:

New European Supply May 15, 2025:

Unicredit (UCGIM), Credit Agricole SA (ACAFP, Baa1/BBB+), NatWest Markets PLC (NWG, A1/A),

Barclays PLC (BACR, Ba1/BB-), HSBC Holdings PLC (HSBC, A3/A-)

Sold about €6 bil of holdco and AT1 bonds.

Systematic Trading Model Indicators – Thursday

We have now seen over 200 of the world's largest 250 corporate bond issuer balance sheets for the period ended 3/31/25. While more issuers are adding net debt than at any time since COVID, the amount and sectors adding balance sheet debt are highly differentiated. This is leading to almost $4 trillion (over 3,800 bonds) that our credit trading model output identifies as potential attractive short trading indicators.

Systematic Trading Strategy for Thursday May 16

The trading model lost 45 attractive short trading indicators on Thursday and continues to indicate that incremental short trading positions should be added to overall exposures.

Long Positions: Attractive bonds (or new supply) from issuers that have already reported results. However, an issue size above $1 billion is the sole indicator for fixed-coupon bonds. While the model added new Toyota Monday supply, 9 long indicators have since reached their avoid trading levels. There were no new indicators overnight that fit that description.

Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet. Today, the model adds the most attractive short Williams Company (Baa2/BBB) WMB 4.65 08/15/32.

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

Yesterday, the model's top attractive short trading indicators was Goldman Sachs (A2/BBB+) GS 2.6 02/07/30. Today the model adds Williams Company (Baa2/BBB) as the next attractive short trading indicators WMB 4.65 08/15/32

Wednesday Sample Trading Indicators Credit Spread Movement

Since the January 4, we've published 102 secondary and new-issue trading indicators from our model:

• 55 of 77 attractive long indicators have reached their avoid-trading level and tightened by (-9.1bp) on average

• 24 of 26 attractive short trading indicators have reached their avoid-trading level and widened by (+5.3 bp) on average.

• The remaining 21 long indicators credit spreads have widened by (+2.6bp) wider on average.

• Across all 102 indicators, credit spread movement has been +/- 4.88 bp in the direction of the rec.

Earnings reports from this morning, yesterday and last week

Mitsubishi UFJ (MUFG, A-/A SNP)

• Mitsubishi UFJ Financial Group reported 2025 FY Net ¥1.86T vs Net ¥1.49T in 2024, slightly below expectations. Management set 2026 guidance of net income ¥2 trillion. Mitsubishi UFJ said it will buy back up to ¥250 billion of shares by the end of July.

• Financial Position: MUFG has significantly more cash than debt. The company has the highest Japanese CET1 capital ratio of 14.18%.

• Model Trading Indicators: There are 32 USD-denominated secondary MUFG bonds with market capitalization of $1 billion or greater. Only those bonds issued during the Covid period with below-market coupons are considered undervalued by the trading model. The MUFG 5.354 09/13/28, MUFG 5.406 04/19/34, and the MUFG 5.426 04/17/35 are considered the most undervalued market coupons in the MUFG secondary trading structure by our model.

Mizuho (MIZUHO, A1/A- SNP)

• Similar to Sumitomo Financial (SUMFG) and Mitsuibishi Financial (MUFG) Mizuho 4Q results were well below expectations. YoY income rose to ¥885 bil or + 206%. Credit related cosrs dropped by -¥61 bil. Deposits by 1%, credit quality improved and credit quality improved for the 4^th year in 5. Management raised 2026 guidance to and said the company will buy back up to ¥ 100 billion of stock.

• Financial Position: Mizuho has more cash than debt. CET 1 capital rose for a 4^th year to 11.18%.

• Model Trading Indicators: While there are 50 USD-denominated secondary Mizuho bonds only 15 have a market capitalization of $900 million or greater. The MIZUHO 5.422 05/13/36 issued @ 98/10Y trades 17 bp outside of new issue spread and is the most attractive bond in the Mizuho secondary structure. The model sees 8411 JP as attractive at last night's closing price.

Alibaba (BABA A1/A+)

• Alibaba reported revenue up 7% year-over-year. Income from operations rose 93% as adjusted EBITA and a decrease in non-cash share-based compensation expense impacted March 2024 results. During the quarter ended March 31, 2025, BABA repurchased a total of 51 million ordinary shares (equivalent to 6 million ADSs) for a total of US$0.6 billion. For the fiscal year ended March 31, 2025, BABA repurchased a total of 1,197 million ordinary shares (equivalent to 150 million ADSs) for a total of US$11.9 billion.

• Financial Position: Alibaba (BABA) has $20 billion of net cash and another $57 billion in long-term investments. The majority of Alibaba (BABA) volatility in reported results stems from the mark-to-market approach of these holdings each quarter.

• Model Trading Indicators: Only 1 of the 15 USD liquid BABA secondary bonds is considered undervalued by our credit trading model. Alibaba (BABA) only sells USD bonds about once every two years. While bonds issued in November 2024 (when credit spreads were at 5-year tight levels) still trade outside of new issue spread, the model does not see those bonds as attractive. The model does not see Alibaba (BABA) equity as attractive at last night's closing price.

Walmart (WMT, Aa2/AA)

• Walmart 1Q revenue of $165.6 billion, up 4.0%. Operating income rose 4.3% owing to increased e-commerce and includes roughly ~100 bps headwind from lapping leap day. Walmart U.S. comp sales rose 4.5% with strong growth in health & wellness and grocery. Guidance for the second quarter was for net sales expected to increase 3.5% to 4.5% in constant currency.

• Financial Position: Despite generating over $5 billion of operating cash flow, Walmart spent $11 billion on capex, share repurchases, and dividends in the March quarter. Shareholder returns accounted for over $6 billion.

• Model Trading Indicators: The trading model participation in the Walmart (WMT) 5 and 10Y new bonds offered on April 23, 2025. The 5Y reached its avoid trading level (-6bp) tighter within two weeks. Th 10Y WMT 4.9 04/28/35 still has (-2bp) of tightening remaining according to our trading model. That was Walmart's first bond offering in 2 years. The model sees the WMT 6 1/2 08/15/37 and WMT 3.95 06/28/38 as undervalued. The trading model sees WMT equity as attractive at last night's closing price.

Siemens AG (SIEGR, Aa2/AA-)

• Siemens 2Q revenue rose 6% on a comparable basis. New orders totaled €22.6 billion, +9% year-over-year. After-tax PNL rose +13.3% YoY. The book-to-bill ratio was a strong 1.10.

• Financial Position: SIEGR net debt is approaching prior peak 2022 levels @ €33.5 billion. The Siemens balance sheet moves with acquisitions and divestitures that have led to constant transformation of SIEGR business platforms.

• Model Trading Indicators: While there are still 12 USD-denominated SIEGR secondary bonds, the company hasn't sold US debt since 2021. While the trading model does see the SIEGR 3.4 03/16/27 and SIEGR 1.7 03/11/28 as attractive short trading indicators, there is little downside (in terms of credit spread widening) owing to the short maturity of both bonds. The SIEGR 2 7/8 03/11/41 is (-9bp) from becoming an attractive short trading indicator. The trading model does not see SIE GY equity as an attractive short as of last night's closing price.

John Deere Credit (DE, A-/A3)

• Deere reported 2Q revenue that fell (-16%) and operating earnings that dropped (-24%). YTD numbers are (-35%). Deere said that including the effects of tariffs, it expects fiscal 2025 net income of between $4.8 billion and $5.5 billion, below prior guidance of $5 billion to $5.5 billion, and down from $7.1 billion reported in the previous fiscal year.

• Financial Position: The Deere balance sheet has been adding net debt almost perpetually since 2010. Similar to Pepsico (PEP) and Philip Morris (PM), Deere management incorporates shareholder payout and John Deere (DE) balance sheet leverage.

• Model Trading Recommendation: John Deere (DE) credit and corporate have 50 liquid USD secondary bonds in circulation; however, only 14 of the outstanding bonds have market capital of $900mm or more. The model sees three of the John Deere (DE) bonds as attractive short trading indicators, with the DE 5.15 09/08/33 the most attractive. Our trading model sees John Deere (DE) equity as an attractive short.

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.