Systematic Credit and Equity G-255 Trading Indicators for July 16, 2025
The June CPI core number (2.9% YoY but 0.2% MoM vs a 0.3% estimate) elicited a mixed response from interest rate markets. Ultimately, the UST 10-year yield rose on the day (see page 2).
The first day of 2Q bank earnings reports brought no systematic indicator issuer changes on Tuesday, and it is too early to identify trends in balance sheet and earnings data.
2Q earnings updates: Of the nine G-255 issuers reporting June quarter earnings (with two additional Nordic banks reporting this morning), only DNB (DNBNO, A2/A-, attractive short) saw a change in its summary model indicator. Thus far, three issuers are adding net debt, while four have more cash than debt or are de-levering their balance sheets.
With the majority of issuers reporting over the next few weeks being financials, two regulatory developments are noteworthy. In the US, bank regulatory capital requirements are expected to be reduced in 2025. In the UK, where five banks are rated attractive long and two attractive short, the Bank of England has proposed extending the deadline for investment banks to implement global capital rules for their trading businesses. The Prudential Regulation Authority is consulting on delaying the "Fundamental Review of the Trading Book" for banks using internal model approaches until the start of 2028.
It is reasonable to expect that other global bank regulatory agencies may follow suit, consistent with historical patterns. This has already shown that certain bank balance sheets already carry more leverage in 2025 than in any of the previous 5 years. Consequently, central bank balance sheets are expected to shrink.
Central Bank Policy - Bank balance sheet leverage: Two market risk components are tied to changes in central bank reserve policy. The first pertains to USD new financial supply. While approximately 60% of "bank funding requirements" have reportedly been met in the first half of 2025, the definition of "funding requirements" remains unclear. Our trading model universe includes 65 financial issuers (excluding auto finance), representing $11 trillion of the $20 trillion in publicly traded debt and preferred securities. More significantly, these issuers account for nearly $10 trillion of the $12.5 trillion in liquidity among the world's top 255 issuers.
The relevance of "funding requirements" is uncertain. Over the past 24 months, share buybacks and dividend growth have doubled, with roughly half funded by bank corporate debt issuance. Bank issuance is now more influenced by interest rates and credit spreads in the markets where each bank holding company operates and is governed.
The deregulation of banks and re-levering of balance sheets is not a new phenomenon but is often politically driven. In the US, this has occurred three times in my lifetime, each leading to what Alan Greenspan once called "over exuberance." Greenspan initially testified to Congress that financial markets could accurately assess the risks of subprime lending, though he later admitted this perspective was incorrect. The market's corrective actions cost trillions and took roughly eight years to recover.
Our systematic trading model does not predict market activity but reacts to it, using underlying balance sheet information to generate market indicators instantaneously. We will continue to provide updates on model output for issuers reporting before trading opens and produce an earnings digest with issuer details by mid-day to avoid lengthy reports.
Systematic Credit Trading Model Output:
Yesterday, we provided a comprehensive capital structure trading indicator sheet for Wells Fargo (WFC A1/BBB+ attractive short). The model output for WFC bank notes differs significantly from that for WFC perpetuals. For detailed issuer credit trading curves, bond, or sector indicators, please contact: Larry Domash
Bloomberg: ldomash8@bloomberg.net
Curve Publishing e-mail: larry.d@G-255.com
LinkedIn: www.linkedin.com/in/larry-domash-94928430
As noted on Tuesday, while analysts, strategists, and market commentary anticipate US interest rate cuts as early as this month, banks are not aligned with this view. SHBA SS, SEB SS, and DNB loan books grew in 2Q 2025, yet all reported high single-digit declines in net interest income due to lower interest rates.
Upcoming Earnings This week: 31 major global corporate debt issuers will report, 27 of which are among the 255 largest global corporate borrowers. Of these, 23 are financial issuers, and 15 of the 25 G-255 issuers were reducing net balance sheet debt as of Q1 2025.
G-255 Issuers reporting results Wednesday:
Skandinaviska Enskilda Bank (SEB, Aa3/A+ attractive short) Reported
Svenska Handelsbanken AB (SHBASS, Aa2/AA- attractive long) Reported
Prologis Inc (PLD A2/A attractive short) Q2 25
PNC Financial Services Group I (PNC A3/A- attractive long) 06:30 Q2 25
Bank of America Corp (BAC A1/A- attractive short) 06:45 Q2 25
Johnson & Johnson (JNJ Aaa/AAA attractive short) 06:45 Q2 25
Goldman Sachs Group Inc/The (GS A2/BBB+ attractive short) 07:30 Q2 25
Morgan Stanley (MS A1/A- attractive short) 07:30 Q2 25
United Airlines Holdings Inc (UAL Ba1/BBB- attractive long) Aft-mkt Q2 25
Alcoa Corp (AA not a G-255 issuer) Aft-mkt Q2 25
Kinder Morgan (KMI Baa2/BBB attractive short) Aft-mkt Q2 25
Inflation, Economic Data, and Interest Rates
US Core CPI for June 2025 rose 0.2% compared to May and 2.9% year-over-year, below expectations.
-While Bloomberg markets viewed this as a key factor for potential Fed rate cuts at the July meeting, the UST 10-year yield rose by 0.03 basis points to 4.48% on Tuesday.
The Empire State Manufacturing Index for July climbed to 5.5 from -16.0 in June. Prices paid reached a 2025 high of 56.0, and new orders turned slightly positive.
Systematic Trading Model Insights and Trading Strategy (July 15, 2025)
The Systematic Trading Model generates indicators daily for over 6,000 bonds, with 737 currently within 20% of their 52-week tight or wide spread levels (22% above historical averages). Over the past week, there has been a notable reduction in bonds trading near 52-week tight spreads in sectors identified as overvalued by the model.
Current Trading Allocation Strategy
-57% long
-23% short
-20% front-end allocation (75% in floating-rate notes maturing within 3 years, targeting undervalued, de-levering bonds).
Performance: Of 131 long/short trades (marked to market via TRACE) in 2025, 92% achieved ±5 bp targets, averaging ±7.52 bp per trade.
Recent Activity:
-The model paused adding short positions on July 2, 2025, due to the number of non – replaced long trading positions over the last week of June – first week of July
-Between June 30 and July 11, 2025, 11 long trade indicators reached "avoid" levels, prompting a shift to a "more short" stance in the long/short basket.
-Thursday's trading allocation adjustment was driven by recent high yield credit fund outflows.
Sector Trading Indicators for Wednesday
Long:
-Yankee Banks (particularly floating-rate notes).
-Single A TMT.
Short:
-U.S. Big 6 Money Center Banks.
-Single A Healthcare.
-Single A and BBB Industrials (re-levering, with tight spreads).
-BBB TMT with larger issuer tech firms re-levering.
Risk Management: The model avoids adding risk to G-255 issuers scheduled to report results within 30 days, in compliance with global regulatory requirements for reporting "material events" within 30 days of a scheduled earnings release.
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -5% below average
-G-255 Issuers: 95 of the top 100 traded issuer bonds, accounting for 94% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
-Volume: average
-G-255 Issuers: 13 of the top 25 traded bonds, accounting for 57% of top 25 issuer volume and 49% of total TRACE volume.
Market Movement
U.S. CDX Index: +1bp wider Tuesday @ 52 bp
U.S. IG Cash Spreads: Were +1bp wider to -2bp tighter; BBB US financials and industrials outperformed while no sectors were more than +.5bp wider.
CDX HY Index: fell -.2 pt @ 107.20 (per Bloomberg)
HY Cash Bonds: Were unchanged while BB energy bonds were slightly lower after outperforming on Monday.
High-Yield Activity
- Dealers bought $ 800 million of HY bonds Tuesday.
Most Bought HY Bonds
- Petro Mexicanos (PEMEX B3/BBB attractive short)
Most Sold HY Bonds
- Six Flags (FUN B1/BB-)
Investment-Grade Activity
- End users net bought $1.5 billion of IG bonds Tuesday.
Most Sold Sectors and Bonds traded
Most Sector: Consumer Staples.
- Conagra Brands new issue (CAG, Baa3/BBB-)
- Kraft Heinz (KHC Baa2/BBB attractive short)
Most Bought Sector: US Big 6 Banks
- Goldman Sachs (A2/BBB+ reports earnings today)
- Bank of America (A1/A- reports earnings today)
- JP Morgan (JPM A1/A- attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers Overall model indicators 181 bonds ($257.6 billion) are considered undervalued by the stochastic credit trading model with 72 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1387 bonds ($1.16 trillion) are considered overvalued by the stochastic credit trading model with 665 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $718.9 billion in overvalued market capital across 285 bonds, with 91 short indicators.
BBB TMT $210.5 billion in overvalued market capital across 128 bonds, with 45 short indicators.
Single A, BBB and Industrials $152.7 billion in overvalued market capital across 122 bonds, with 69 short indicators.
Single A Healthcare $177.9 billion in overvalued market capital across 122 bonds, with 46 short indicators.
Issuer News
Starbucks ( SBUX Baa1/BBB attractive short) was the subject of a Bloomberg business week article on Tuesday after recently being mentioned as possibly selling their Chinese operations. The issuer reports result July 29.
Rio Tinto (RIOLN A1/A attractive long): Rio Tinto's second-quarter iron ore shipments rose 13% sequentially according to Reuters as Iron Ore traded over $100 for the first time since March. Issuer confirmed 2025 guidance and roughly $300mm of costs associated with US trade tariffs. Rio reports on July 30.
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.
Valuation: U.S. credit remains slightly overvalued based on output from our credit trading model.
2025 credit spreads: Are wider YTD.
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices showed moved in opposite directions for 8th time in 62 trading days. As mostly unchanged earnings results from 5 US banks and no new supply left US credit more or less unchanged while the SPX dropped (-.40%) and the Dow Jones Industrial Average fell (-1%). The equity markets were on Tuesday more focused on the potential impact of US trade negotiations. With bank earnings as well as reports from three non – financial issuers on Wednesday, we will see how both markets react.
New Supply, Bond Maturities, and Credit Fund Inflows for July
No new G-255 supply in USD, EUR or GBP on Tuesday.
As mentioned, we expect to see some US bank supply over the remainder of the week as we wait to see Wednesday's and Thursday's ETF and retail credit fund flows.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 665 +62 from Tuesday and roughly flat with last Wednesday.
72 attractive long indicators: 4 fewer than Tuesday.
Systematic Portfolio Trading Model Indicators:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for long positions is 7 years.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid short positions with maturities around 7 years, as they are the least attractive.
Replace Longs: Replace systematic attractive long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Once the portfolio reaches a 75% long hurdle, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
-11 long trades have reached their avoid trading levels and require replacement.
Systematic Credit Trading Strategy July 16, 2025
Closed Positions: The model exited the 11 long trades that have reached their avoid trading levels (including the Nissan 5Y from Friday) over the past 2 weeks.
Enter New Longs:
Implement new attractive de-levering supply that comes to market this week per the published indicators.
Monitor Portfolio Composition:
Track the percentage of long positions relative to the total portfolio.
If replacing the 11 long positions that have reached their avoid trading level pushes the portfolio above the 75% long hurdle, initiate short positions in re-levering issuers (avoiding 7-year maturities) at a 1:1 ratio for any additional long positions.
Review: Reassess portfolio balance after next Thursday's fund flow data to ensure alignment with the systematic model.
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.
Current Sample Systematic individual bond trades based on trading strategy
Most Recent Systematic long/short trades:
With no new G-255 supply that fits the model input, we are looking to add net 11 new bonds of G-255 issuers that are de-levering their balance sheets.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 15, 2025)
Total Trades: 131 (1% of total indicators).
Performance Summary:
Long Indicators: 92/100 reached avoid-trading levels, tightening by -9.59 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 8 tightened by -.88 bp.
Remaining Shorts: 4 tightened by -12.75 bp.
Average Spread Movement: ±7.48 bp in the indicated direction.
Success Rate: 92% of indicators reached avoid-trading levels which is normal.
Average trade holding period: (22 trading days) + 17% above normal.
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.