Systematic Credit and Equity G-250 Trading Indicators for May 12, 2025
Tariffs, what tariffs?
Good Morning: So whatever concerns anyone had about the impact of global trade discussions should "forget about it." Headline trading is what is driving risk markets and "it is, what it is." While US equity futures are now at 6.4% of Dec 2024 – February 2025 triple top, actual 2025 – 2026 earnings and cashflow growth remains uncertain.
We are 75% through 1Q earnings season and credit spreads are +17 to +35bp wider (sector dependent), clearly underperforming equities. We continue to see slight credit fund outflow and despite significantly less new supply YoY and almost ($45 billion) of global 250 USD bond maturities in the past 2 ½ weeks, cash credit is no longer "long only" cheap, it's just undervalued. For now, our trading model output indicates that added risk needs to be balanced between long and new short positions.
Inflation readings and Interest rate calls
While trading headlines via futures and ETFs has become the dominant vehicle fueling risk trading, we are focused on topics other than trade headlines. We see US CPI, PPI, Import prices, and University of Michigan inflation expectations this week. With equity futures rallying quickly, the market's expectation of a Fed interest rate cut in the next two meetings is fading. In the meantime, the Bank of England cut rates last Thursday, and UK and US overnight central bank borrowing rates are now identical (4.25%), which is rare. The impact of slightly rising US interest rates on credit spreads has yet to be observed.
Earnings Season
This has been one of the more interesting earnings season in years.
US banks and insurance companies added $160 billion of net debt QoQ and over $400 billion YoY. We note, however, that US banks still have $2 trillion of liquidity and $2.7 trillion of total debt. So, while the additional leverage and lack of loan growth has pushed US credit spreads wider, there are no credit events on the horizon for any of the largest US financial institutions.
At the same time, US banks are growing their dividend and share repurchase programs at an unsustainable pace (32% YoY)
Overall, large corporate balance sheets are re-leveraging slightly due to material net debt reduction at non-US banks.
As for non-financial sectors adding cash and not debt (de-leveraging), that would be TMT and Airlines. Sectors with the most net debt? Energy, Autos, and Utilities.
The single similarity between issuer re-leveraging and de-leveraging? They are both growing share repurchase + dividends at a rate materially faster than revenue growth.
Friday's US IG Credit Trading:
USD trading volumes were again (-15%) below average for a Friday, with dealers buying another $1 billion of US IG credit and more than $10 billion during the month of May. We are still uncertain whether this morning's China/US trade headlines will change the US credit trading paradigm, with more new large-cap supply sold in non-USD than at any time in recent history. US CDX was slightly wider Friday @ 61.5 bp, while cash was (-1bp) tighter overall.
Given the materially lower volumes (even for a Friday), it's difficult to say that one sector outperformed on Friday.
Attractive trading sectors
Attractive Long Trading Sectors: As US IG credit spreads continue to crawl tighter, BBB-rated TMT, BBB-rated healthcare, and UK banks are now the only attractive long sectors remaining within the 6,200 USD bond universe analyzed daily by our model.
Attractive Short Trading Sectors: None. The consumer sector is re-leveraging. Consumer credit spreads are (+9bp) wide of attractive short trading levels. Single A Industrials are (+9bp) wide of their attractive short trading levels. US Big 6 banks are also attractive short trading Indicators (-3 to -5bp) tighter from current trading levels, while Single A-rated Healthcare needs (-8 to -10bp) 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
Shares of pharmaceutical companies fell across Europe and Asia after President Donald Trump announced plans to cut US prescription drug costs to align with other countries.
The announcement is pressuring drug-related stocks, with companies that depend on the US for a large portion of sales being especially vulnerable, due to concerns their profits will take a hit if they have to reduce prices in the US.
Toyota Motor Corp. is projected to lose $1.2 billion in profit in two months due to duties on imported cars and auto parts, making it the auto industry's biggest loser in the US-China trade war.
Inflation Readings and Government Bonds
We will see several inflation readings this week. As for raw data, we note that US used car prices are +1.0% higher over the past 30 days and +3.2% over the past 90 days. Overall food inflation (both grocery and food away from home) is expected to be well over 3% for the month of April. US average hourly wages were +3.8% YoY, the lowest reading since last July. Housing costs rose just 1% YoY. Retail prices for soft goods are up almost 4.5% YoY.
We also look at electricity and gasoline prices as inputs to the CPI number. However, our ability to calibrate a precise CPI number or an estimate of materially higher MoM CPI lacks sufficient raw data to support it.
U.S. IG Credit Valuation
US investment-grade (IG) credit is undervalued and no longer "most attractive" or "attractive" for long credit Indicators for the first time in 38 trading days.
Global Equity Correlation to IG Credit Spreads
US 10Y credit spreads correlated with equities on Friday, with US equities slightly lower. That said, General Motors (GM) equity is 6% higher YoY, while General Motors (GM) 5-year credit spreads are roughly (+40bp) wider YoY.
New Supply / Bond Maturities / Credit Fund Outflows for May
The new HSBC deal did not trade well on Friday as the issuer sold debt in Europe twice this week (Euro $ and € deals roughly $10 billion in total).
The Euro Dollar FRN is large by any market standard. We have had over $30 billion of G-250 USD bond maturities in the past 8 trading days.
US retail credit funds continued to show slight outflow last week, while new large-cap USD supply is down roughly (-35%) YoY.
Systematic Trading Model Indicators – Weekend
After 38 trading days and roughly (-20bp) of overall credit tightening, our trading model has finally lost its "long-only" stance across its 6,200-bond, 250-issuer USD large-cap universe.
Systematic Trading Strategy for Friday May 12
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. Thus far, the strategy has been successful, but new supply from Alphabet (GOOGL), Apple (AAPL), and Bank of America (BAC) has underperformed, while new supply from PNC Corp (PNC) outperformed.
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.
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
The new HSBC (HSBC,A3/A-) new USD HSBC 5.24 05/13/31 and the HSBC 5.79 05/13/36 as UK banks are the most attractive long trading sector but did not perform at all on Friday. .
TFC 3.3 05/15/26 Bank subordinated is bail in capital and will most likely be called on Thursday. As to whether that leads to new Truist Financial (TFC) supply we shall see.
Thursday Sample Trading Indicators and 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 have widened by an average of +.9 bp.
• Across all 42 indicators, credit spreads are (-5.56bp) 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 recs issued before February 22 that haven't yet hit the avoid-trading threshold:
• Four are BBB-rated and have widened by +25.3 bp on average since being recommended.
• They currently trade at 150.3 bp over the UST curve, with an 8.2-year duration.
• Our model projects an average spread tightening of -31.3 bp remaining.
• Six are single-A rated and have widened by +17.2 bp since being indicated.
• They now trade at 109.5 bp over the UST curve, with a 10.7-year duration.
• The trading model indicates an average spread tightening of -21.8 bp remains.
Earnings reports from last week
Burlington Northern (BNI, A2/AA-)
• The US' largest railroad reported flat YoY 1Q revenue and 8% operating earnings growth. Keeping with today's trading topic, increases in West to East traffic were significant in this report. BNI is owned by Berkshire Hathaway and doesn't hold conference calls or provide guidance. Nonetheless, a strong quarter.
• Financial Position: BNI is neither adding nor reducing total or net debt. They did, however, raise their dividend to the parent by 40% YoY.
• Model Trading Indicators: Of the 25 BNI holdco secondary USD bonds in circulation, just 5 have market capital of $1 billion or more. Burlington Northern has come to the US new issue market just once in 2 years. Our trading model avoids the BNI secondary trading curve but would certainly participate in issuer new supply.
Gilead (GILD, A3/A-)
• Gilead filed their first quarter 10-Q on Thursday. Cash flow from operations after investing was $8mm for the quarter. Free cash flow after dividends and share repurchasing was (-$1.39 bil).
• Financial Position: Gilead's balance sheet was re-leveraging QoQ, but net debt was still ($3.45 bil) lower YoY @ $17 bil.
• Model Trading Indicators: Our trading model sees 4 of the 18 liquid secondary GILD USD bonds as undervalued, with the GILD 5.1 06/15/35 being notable. However, the model would see Gilead secondary as an attractive long indicator (+8bp) wider than Friday's trading levels. The model also sees GILD US equity as attractive at Friday's closing price.
Public Service Enterprise (PEG, Baa2/BBB)
• PEG filed their 10-Q on 30 April. Revenue rose 16.7% YoY, while net income was up 11%. Operating cash flow, however, rose 40%. Despite reported results and management's reaffirmation of earnings guidance, PEG equity did not initially benefit.
• Financial Position: PEG net debt was flat QoQ after dividend payout. YoY net debt rose 5% to $22.5 bil.
• Model Trading Indicator: While PEG has $24 billion of total debt and 58 USD secondary issues in circulation, only 2 bonds (PEG 2.45 11/15/31) and (PEG 5.2 4/1/29) are notable. Our trading model avoids the PEG secondary trading curve due to insufficient liquidity to maintain an attractive short trading indicator. The trading model does see PEG equity as attractive at Friday's closing price.
Chevron (CVX, A2/A- SNP)
• Chevron filed their first quarter 10-Q. To keep things simple, after capex cashflow was (-$429mm). After returns to shareholders, CVX cashflow was (-$7.112 bil). Hence the headlines relating to share repurchasing going forward.
• Financial Position: CVX balance sheet is back up to $25 billion of net debt before $50 billion of long-term investments. That's a +$9 billion rise in net debt YoY.
• Model Trading Indicator: CVX has 23 liquid USD secondary bonds, and our trading model sees 6 of them as overvalued, but only the CVX 4.687 04/15/30 is considered an attractive short trading indicator at current trading levels. The trading model does not see CVX equity as attractive from a long perspective at Friday's closing price.
Charles Schwab (SCHW, A2/A- SNP)
• Schwab filed their 10-Q on Friday. As usual, it took twice as long to analyze the Charles Schwab 10-Q compared to other US financials. 1Q revenue rose 6%, while net earnings rose 40% YoY. Both revenue and earnings growth are accelerating post-1Q reported results.
• Financial Position: Schwab has a 28% CET1 capital ratio and has reduced net debt by (-$13.5 billion) in the past year. Over the past quarter, net debt rose $4 billion as Schwab paid out $2.095 billion to shareholders vs. $563mm in 1Q 2024.
• Model Trading Indicator: Charles Schwab (SCHW) has not issued any USD debt since November 2023. The SCHW 1.15 05/13/26 is callable on Tuesday, but the bond is not TLAC capital, so it's unlikely to be called. There are 17 liquid SCHW USD secondary bonds, with 5 of them undervalued according to our trading model. All of the bonds, including the SCHW 4 PERP, have extraordinarily low coupons due to when they were issued. The trading model sees the SCHW 1.95 12/01/31 as the most attractive. With Charles Schwab (SCHW) equity trading at an all-time high as of Friday's close, the trading model does not see it as attractive.
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.