Systematic Credit and Equity G-250 Trading Indicators for May 6, 2025
Model Indicators
Good Morning. Bloomberg trying to create headlines with Caixin China Services PMI data (50.7 reading for April) which isn't significantly different from the US Services April PMI data. Yes, US equity futures are down this AM. The problem with that assessment is that US equity futures have been down at this time of day 4 of the past 7 trading days, yet the SPX is +175 pts over that period.
If US stocks trade on earnings, then futures should be lower, and the actual trading of equities should be lower. However, over the past 3 weeks, that has not been the experience. Credit spreads have followed equity prices over the period, not the other way around.
In the meantime, Standard Chartered (STANLN, A3/BBB+) is in the market with a 6nc5 fixed and FRN overnight.
Trump tariff talk
Much more talk about how well-planned the Trump "plan" is. This was the notion at the Milken conference in California on Monday. What plan? When you plan trade agreements, you actually speak to constituents before making statements of change.
On tariffs, we are being told by non-US (non-Bloomberg) parties that the news flow should show deals with the UK, India, Japan, and South Korea shortly.
As for the economic impact, we are still 2–4 months from the first indications.
New Issue Indicators and our Trading Model
Now that more than a few people are picking up the Daily Trading Summary and Trading the Indicators, it's time to answer a few more questions. Yesterday's new supply brought out a few. "How does the trading model determine attractive entry spreads on new issues, and are the entry spreads different for issuers with deleveraging balance sheets?" A: The systematic trade does not use any subjective input. Credit rating, balance sheet direction, and current secondary trading spreads create output as to the spread level most likely to create a (-5bp) tightening from new issue in the shortest period of time.
Hence, we provide those entry levels before the deals are priced. How much spread tightening remains post-pricing is published the following AM.
Earnings Season
Thus far, 150 of the 250 largest issuers of corporate debt have reported results for the period ended 3/31/25. 22 issuers will not report March results as they only report balance sheets for June and December.
So far, we have 133 of the 150 issuer data written up (we don't add the reported data to our model unless we have published the result first). The integrity of the output is paramount. We have only published revenue growth and shareholder payouts of non-financial issuers thus far, owing to the lack of disclosure of cash flow in so many bank earnings announcements.
For the issuers that we have balance sheet data on, we see $9.86 trillion of debt, which is divided as follows: $2.4 trillion issued by 20 US financial institutions, $3.8 trillion issued by 16 non-US financial institutions, and $3.653 trillion issued by 98 global non-financial issuers.
As for quick conclusions: First, US banks are growing their balance sheets faster than any other sector. The 15 non-US financial institutions that have reported results have $164 billion more cash than debt. Thus far, of the 98 non-financial issuers that have reported results, net debt is growing by only 1.27% QoQ.
At the same time, global non-financial issuers are paying out capital to shareholders at a rate 3x faster than their year-over-year revenue growth.
Monday's US IG Credit Trading:
The day was dominated by relatively small deals for 5 G – 250 issuers with dealers buying about $1.6 billion of IG paper, and the new supply accounting for 22% of dealer net buying. Both cash and the IG CDX were tighter Monday but by less than (-1bp). We saw net buying of Big 6 bank bonds, and they outperformed again, as did Single A-rated industrials.
Volumes were (-23%) below average for a Monday due to the London May Day holiday. Comcast (CMCSA), Apple (AAPL), Prologis (PLD), and DTE Electric (DTE) were 4 of the top 10 issuers traded, with the remainder all Big 6 banks.
How to trade Earnings Season
I know we sound like a broken record:
Long Positions: Attractive bonds (or new supply) from issuers that have already reported results. Those would include the UK bank and Broadcom (AVGO) recommendations Monday, as well as the Apple (AAPL) and Standard Chartered (STANLN) new supply.
Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet.
The trading model prefers non-US banks as its top sectors and bonds for attractive long indicators.
Intesa Sanpaolo reports results later today, while the three Japanese majors and Australian banks report next week. Canadian banks shortly after that.
Issuer News Monday
UBS Group AG (UBS) agreed to pay $511 million to settle a US investigation into how Credit Suisse Group helped wealthy Americans evade taxes.
Sumitomo Mitsui Financial Group Inc. (SMBC) is in talks to buy a significant minority stake in India's Yes Bank Ltd.
Inflation Readings and Government Bonds
The April ISM prices paid index rose to 65.1, the highest level since 2022, while the overall ISM services index data for April was 51.6 vs. 50.8 in March.
The UST 10Y remains (-21bp) lower in yield YTD.
U.S. IG Credit Valuation
US investment-grade (IG) credit continues to be the "most attractive" for long credit indicator for the 34th consecutive trading day. See details in the Model output section below.
According to Bloomberg, overall US IG credit spreads have tightened by (-12 to -14bp) since our trading model hit its largest "long only" attractive reading in 5 years.
The model also indicates that we would need (-6 to -10bp) of additional index credit spread tightening prior to the "Long Only" output changing.
Finally, we note that overall IG credit spreads widened by (+64 to +70bp) from 11/06/24 (when our trading model hit its largest attractive short rec ratio) to 4/10/25 when our trading model hit its largest attractive long rec ratio.
Global Equity Correlation to IG Credit Spreads
We saw similar correlation between USD 10Y credit spreads and equity index movement Monday, with US equities declining slightly and US corporate credit only modestly tighter. As noted above, the risk to US credit spreads at present is twofold:
(1) Reported earnings for the remainder of the world's non-financial issuers. Historically, the later in the cycle an issuer reports, the less optimistic the result and outlook.
(2) As we have written numerous times, 1Q operating cash flow is not covering dividend payments and share repurchases of the world's largest borrowers.
New Supply / Bond Maturities / Credit Fund outflows for May
Since we wrote up all of Monday's new supply mid-day, two attractive deals came on Monday: the Apple (AAPL) and Prologis (PLD) deals.
The problem with the PLD deal is trading size (similar with other non-Apple deals). 75 to 85% of all the trades in the smaller deals (below $1 billion) for the next 6 months will occur in the 20 trading days. Pricing of smaller deals tight of attractive spread also limits the upside of the overall market according to our trading model.
We did have 1 more bond mature on Monday ($1 billion) total.
Systematic Trading Model Indicators – Monday
We saw US IG spreads relatively unchanged Monday with London closed for the holiday. We did, however, see trading model output add 9 attractive short trading recommendations post-earnings results. This is the highest number of short trading recs in a month.
The model maintains its "long-only" stance across its 6,200-bond, 250-issuer USD large-cap universe for the 34th consecutive trading day. Attractive short indicators remain near five-year lows, with over 73% of model indicators classified as attractive long.
Attractive Trading Sectors
Attractive Long Trading Sectors: Single A and BBB-rated TMT, UK banks, French banks, BBB Energy, US Regional, and Canadian banks are the most attractive long trading sectors this morning within the 6,200 USD bond universe analyzed daily by our model.
Attractive Short Trading Sectors: None. The consumer sector is releveraging. Consumer credit spreads are (+10bp) wide of attractive short trading levels. Single A Industrials (-12bp) tighter, US Big 6 banks are also attractive short trading indicators (-6 to -8bp) tighter from current trading levels.
Systematic Credit Indicators
Our systematic strategies employ defined trading processes and portfolio construction parameters. This clarity differentiates them from discretionary approaches, offering replicable and auditable methods. We rely only on stochastic trading algorithms to identify opportunities, backtested on historical data to validate strategy performance. We target ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.
Most Recent Model Trading Indicators
This morning, the trading model adds Apple (Aaa/AA+) AAPL 4.2 05/12/30 and AAPL 4 3/4 05/12/35 new supply.
Citigroup (C) (Baa1/A-) C 4.952 5/7/31 reached its avoid trading level on Monday.
Monday Sample Trading Indicator Credit Spread Movement
Since February 24, we've published 36 secondary and new-issue trading indicators from our model:
• 14 indicators have reached their avoid-trading level.
• The remaining 22 indicators have widened by an average of +2.6 bp.
• Across all 36 indicators, credit spreads are (-2.3bp) 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 +28.33 bp on average since being indicated.
• They currently trade at 153 bp over the UST curve, with an 8.2-year duration.
• Our model projects an average spread tightening of -33.3 bp remaining.
• Six are single-A rated and have widened by +21.2 bp since being indicated.
• They now trade at 113.5 bp over the UST curve, with a 10.7-year duration.
• The trading model indicates an average spread tightening of -26 bp remains.
Earnings results later Today
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Earnings yesterday and last week
Ford (F) (F, Ba1 / BBB-)
• Ford Motor Credit reported strong 1Q earnings of over $420mm. Unfortunately, Ford Motor Company reported no net earnings on just under $38 billion of revenue. Despite talk about trade tariffs, Ford's auto profitability, even in a positive revenue environment, is inconsistent.
• Financial Position: Cash flow from operations and investments in the quarter was a positive $210mm, while the company paid out $1.2 billion in dividends. Had this financial management team been in place 20 years ago, Ford would be in a different financial position. Ford is releveraging due to the need to continue funding sales, which fell by (-6%) YoY in 1Q 2025.
• Model Trading Indicates: Our trading model avoids the Ford (F) secondary credit trading curve as we wait to see unit sales volume for the company in 2Q 2025 and subsequent financing of those sales.
Celanese (CE, Ba1 / BB+)
• Celanese reported 1Q results that did not meet expectations, with revenue declining (-10%) YoY, operating income dropping (-22%), and net earnings swinging to a reported loss.
• Financial Position: While CE is neither adding nor losing net debt and reaffirmed EBITDA guidance for 2025, the issue for the company is a shrinking revenue base against a balance sheet that is already heavily leveraged. Debt/Revenue of just over 1x does not portend a positive operating situation.
• Model Trading Indicates: Given the large discount CE secondary bonds already trade at, our trading model avoids the Celanese secondary credit trading curve.
Svenska Handelsbanken (SHBASS, A2 / A SNP)
• Handelsbanken reported flat 1Q revenue and earnings that beat expectations. They also reported an 18.3% CET1 capital ratio and affirmed earnings guidance for 2025. Deposits are growing, and loan quality is improving.
• Financial Position: Handelsbanken has been derisking and deleveraging as it acquired the asset management division of Handelsbanken AB Finland.
• Model Trading Indicates: There are only 5 liquid USD SHBASS secondary bonds. Our trading model sees the SHBASS 5 1/2 06/15/28 as the most attractive long indicator.
Pfizer (PFE, A2 / A)
• Reported its 10-Q last night.
• Financial Position: Pfizer continues to shed net debt post-1Q 2025 results. The CP balance sheet is stable, but the company is not reducing debt.
• Model Trading Indicates: Our credit trading model sees Pfizer's secondary trading curve as an attractive long trading Indicator (17 bonds), with the PFE 4.4 05/15/44 the most attractive bond of them all.
Consolidated Edison (ED, A3 / A)
• Consolidated Edison reported 1Q revenue and operating earnings that met expectations and affirmed earnings guidance.
• Financial Position: The Con Ed balance sheet is releveraging slightly, as on-balance-sheet debt is ostensibly flat YoY.
• Model Trading Indicates: There are only 2 bonds in the ED secondary trading structure with $1 billion of market cap or more. Our credit trading model sees the ED 3.95 04/01/50 as overvalued but (-17bp) from being an attractive short trading Indicator.
Williams Company (WMB, Baa2 / BBB+)
• Williams reported 1Q revenue growth of 10% YoY, earnings growth of 4%, and cash flow of almost $2 billion for the quarter. The issuer raised 2025 cash flow guidance, which, in the pipeline business, is "what it's all about." CEO Alan Armstrong is also stepping down.
• Financial Position: The WMB balance sheet continues to relever, which aligns with the company's growth footprint.
• Model Trading Indicates: The issue with WMB from a trading model rec perspective is that the Williams secondary bonds are too cheap to create an attractive short indicator (needs about -15bp more tightening). At the same time, WMB equity is not depressed and does not trade at a discount.
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.
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