Systematic Credit and Equity G-250 Trading Indicators for July 20, 2025
Good morning. Two days after the Federal Reserve meeting, broker/dealer and financial news commentary has shifted focus to Middle East geopolitics, oil prices, and U.S. interest rate outlooks. U.S. equities and credit markets remained largely unchanged on Wednesday. With U.S. markets closed on Thursday for Juneteenth, no non-U.S. G-255 supply was observed. However, retail fund flow data shifted, prompting adjustments to our systematic credit trading model's weekly strategy.
Trading volumes dropped significantly on Wednesday due to the Fed meeting and the subsequent holiday, though investment-grade (IG) credit saw slight buying as spreads weakened marginally. Equities continue to react to Trump-related headlines rather than Iran developments, with economic implications tied to the Strait of Hormuz and Middle Eastern commercial air traffic.
It's been some time since we last addressed this, but historically, a 250,000 eight-week moving average for initial jobless claims correlates with a 4.5% unemployment rate. Currently, no indicators suggest inflation is trending toward the Fed's 2% target. While futures markets anticipate a new Fed chair could lower rates by June 2026 due to political pressure, economic data as of June 20, 2025, does not support imminent rate cuts.
Bloomberg reports the Fed's "Dot Plot" suggests two rate cuts by year-end 2025. However, the actual Dot Plot reveals seven Fed members predicting no cuts and ten forecasting two cuts by December.
Key upcoming data influencing U.S. interest rates includes May's PCE, Personal Spending, and Personal Income figures, due next Friday. Meanwhile, earnings reports from Kroger (KR, Baa2/BBB, attractive long) today and FedEx (FDX, Baa2/BBB, attractive short) next Tuesday will provide insights into U.S. and global economic conditions.
On Thursday, G-250 issuers dominated headlines, primarily driven by Middle East developments.
Trading Strategy and Balance Sheet Analysis
Our first-quarter balance sheet analysis of global banks—covering U.S. Big 6, regional, Canadian, European, French, UK banks, and single-A/BBB-rated TMT—underpins our trading indicators. Today, we highlight Japanese banks, which boast some of the strongest balance sheets globally. Our credit trading model indicates a long Japanese/short Australian banks trade, initiated after 4Q Japanese and 1H Australian bank results were reported last month (see page 6 for details). During the earnings "off-season," we will provide additional balance sheet leverage data to support our systematic corporate bond trading indicators. As noted on page 4, 81% of our 122 published indicators (marked to market by TRACE prints) achieved their ±6.88 basis point trading target.
Trading Model Indicators
Of the 6,000+ bonds in our research universe, 477 are trading near their 52-week tight or wide spread levels, or 13% below historical averages. With minimal retail credit inflows for the week ending June 18, our credit trading model adjusts its positioning:
62.5% long / 17.5% short strategy.
20% allocation to front-end indicators, with 67% in floating-rate notes (FRNs) maturing within three years, targeting undervalued, deleveraging bonds.
Attractive short indicators are running at the long-term average.
TMT and Yankee banks as attractive longs at wider spread levels, and U.S. banks as attractive shorts at slightly tighter levels (see page 6 for Japanese bank review).
Key Trading Issues for Wednesday
With the Federal Reserve meeting occurring before the Juneteenth holiday, overall trading volumes declined by 25% on Wednesday.
Wednesday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading
Volume: 25% below average.
G-255 Issuers: Represented 98 of the top 100 traded bonds, accounting for 95% of top 100 issuer volume and 77% of total TRACE volume.
High-Yield (HY) Trading
Volume: 35% below average.
G-255 Issuers: Represented 17 of the top 25 traded bonds, accounting for 66% of top 25 issuer volume and 58% of total TRACE volume.
Market Movement
U.S. CDX Index: Tightened by 0.3 bp to 56.2 bp.
U.S. IG Cash Spreads: Widened by +2 to +3 bp, with Industrials and Consumer sectors outperforming, while Yankee Senior Banks and TMT underperformed.
CDX HY Index: Rose by 0.2 bp 106, per Bloomberg).
HY Cash Bonds: BB Healthcare outperformed, while TMT underperformed.
High-Yield Activity
U.S. dealers neither purchased nor sold HY bonds on Wednesday.
Most Bought HY Bonds by End Users
Ford Motor Credit (F, Ba1/BBB-, attractive short) was the most bought HY issuer on Tuesday.
Most Sold HY Bonds by End Users
Under Armour (UA, B1/BB-), New 7¼ 7/15/30 ($400mm issued) was the most sold on Wednesday.
Investment-Grade Activity
End users net bought $1.5 billion of IG bonds at wider spreads on Wednesday.
Most Bought End-User Bonds
Bank of America (BAC, A1/A-, attractive short)
Wells Fargo (WFC, A1/BBB+, attractive short)
Most Sold Issuer Bonds
Goldman Sachs (GS, A2/BBB+, attractive short)
Inflation, Economic Data, and Interest Rates
Recurring Jobless Claims: For the week ended June 6, rose 113,000 YoY to 1.945 million.
U.S. Weekly Rail Traffic: For the week ended June 7, totaled 483,807 carloads and intermodal units, down 1.3% YoY.
- Total carloads: Up 3.1% YoY.
- Weekly intermodal volume: 258,506 containers and trailers, down 4.9% YoY.
UST 10Y Rates: Down 18 bp YTD to 4.39%.
Attractive Trading Sectors
Long Opportunities
-None identified. However, 167 bonds ($252.2 billion) are undervalued, with 37 attractive long indicators by the trading model.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $649.6 billion in overvalued market capital across 253 bonds, with 51 short indicators.
Energy (All Ratings): $197 billion in overvalued market capital across 138 bonds, with 83 short indicators.
Single A Healthcare: $140.2 billion in overvalued market capital across 97 bonds, with 31 short indicators.
Issuer News
United Airlines (UAL, Ba1/BBB-, attractive long): Paused service to Dubai due to safety concerns, with plans to resume flights when conditions are safe. Other airlines, including Delta, Air France-KLM, and Air Canada, have also suspended or canceled routes to Gulf region cities due to airspace disruptions.
Canadian Government: Announced new rules restricting federal projects to using steel and aluminum from Canada or "reliable trading partners."
Shell Plc (RDSALN, Aa2/A+, attractive long): Prepared contingency plans for potential disruptions from the Israel-Iran conflict, warning that a blockage of the Strait of Hormuz could significantly impact energy flows.
Google (GOOGL, Aa2/AA+, attractive long): Advocate General Juliane Kokott of the EU Court of Justice issued a non-binding opinion rejecting Google's appeal against a €4.1 billion EU antitrust fine, citing Google's dominant position in multiple markets, which enhances its search and data capabilities.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 50% of the widening observed from November 12, 2024, to April 10, 2025. US credit spreads are now wider on the week.
Valuation: U.S. credit is currently fairly valued but leans closer to the overvalued level.
Global Equity Correlation to IG Credit Spreads
Wednesday marked the 36th of 40 trading days when US credit followed US equity prices. The performance disparity between the 2 markets continues to narrow minimally.
S&P 500 is up 0.68% MoM while the DJIA is slightly -1.16% lower.
US credit spreads are (-10bp) over the the same time period.
YTD the S&P is 1.69% higher
DJIA is down -88%
New Supply, Bond Maturities, and Credit Fund Inflows for June
Telefonica (TELEFO Baa2/BBB- attractive long), Hyundai Capital America (HYNMTR, A3/A- attractive long), Caixa Bank CABSKM A3/A attractive short) sold bonds in Europe on Wednesday and were the only G – 255 issuers to sell debt since Tuesday.
Thus far in June 2025 16 G-255 issuers have sold 41 bonds totalling $31.2 billion with 61% of the supply coming from non – financial issuers. This is a more than (-20%) decline for the month of June YOY for G – 255 USD supply.
US fund flows were reported by Lipper for the week ended June 18:
Short and intermediate investment-grade bonds: $929.6m inflow vs. $2.29b inflow in the week ended June 11
High-yield notes: $356.3m inflow vs. $1.11b inflow
Treasuries: $733m inflow vs. $136.8m outflow
US leveraged loans: $291.3m inflow vs. $354.4m inflow
Mortgage-related: $564.5m inflow vs. $50.4m inflow
Systematic Trading Model Indicators and Strategy
Model Output
435 attractive short indicators: 32 fewer than Wednesday, and just above the 200 day moving average, leaving the IG credit market Fairly valued. TMT accounted for over half of the reduction in attractive short trading recs.
42 attractive long indicators: an increase of 10 attractive long indicators from Wednesday but sill 64% below normal.
Weekly Trading Strategy (Ending June 27) Model output changes slightly until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Add shorts of relevering issuers with the deepest discount from their model avoid point.
Systematic Portfolio Trading Model Indicators: Add 5 short positions for each 4 additional long positions or do not replace 1 of every 5 long positions that reach their avoid trading point.
Systematic Credit Indicators
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.
Most Recent Model Trading Indicators
Union Pacific (UNP, A3/A-): UNP 5.60% 12/01/2054 and UNP 5.1% 2/20/35 are twi of 10 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
Sample Trade Performance Report (January 4, 2025 – June 19, 2025)
Total Trades: 122 (1% of total indicators).
Performance Summary:
Long Indicators: 70/92 reached avoid-trading levels, tightening by -9.95 bp.
Short Indicators: 25/30 reached avoid-trading levels, widening by +5.24 bp.
Remaining Longs: 22 widened by +1.68 bp.
Remaining Shorts: 5 tightened by -3.2 bp.
Average Spread Movement: ±6.48 bp in the indicated direction.
Success Rate: 81% of indicators reached avoid-trading levels (9% below normal).
Notes:
Initial indicators based on TRACE print (or new issue price) at indicated date.
Avoid indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
21 long indicators hit avoid-trading levels, contributing -1.46 bp to overall spread tightening for the 70 long trades.
1 short indicator hit avoid trading level (+5 from model indicated level)
Overall performance improved from ±4.91 bp to ±6.48 bp across 122 sample trades.
Earnings Season Insights
Balance Sheet and Earnings Trends
On Wednesday, we reviewed the operating, loan, and balance sheet metrics of Australian banks. Today, we analyze Japanese bank issuer data as of March 31, 2025, which contrasts sharply with the Australian data. For the past six quarters, the world's 255 largest corporate debt issuers have shown expanding balance sheets. Our systematic credit trading model tracks sector-specific balance sheet and operating earnings trends. As noted over the past four weeks, Japanese banks represent the largest pool of liquidity in the global banking sector, with over $900 billion in net cash held by the four major Japanese banks.
Japanese banks exhibit significantly lower credit risk, with loans comprising only 20% of their balance sheets, while cash and short-term investments account for 41%. Simply put, Japanese banks lend less than any other banking sector globally.
Given these balance sheet dynamics, our systematic credit trading model has indicated bonds from the three major Japanese banks as attractive longs (at wider spreads) and the four major Australian banks as short trading indicators since their earnings were reported last month.
Note: While the March 31 financial data has been converted to USD, the U.S. dollar has strengthened by 5.5% against the Japanese yen since that date.
Note – all results are translated into USD
Key Financial Metrics
Net Income: Increased by $4.0 billion (+137% YoY) and dropped -$559.2 million QoQ driven by 4Q adjustments.
Revenue: Fell by 33% YoY.
Operating Margin: Dropped by -4900 basis points YoY.
Non – performing assets fell by over $3 billion in 4Q 2024.
Note – all results are translated into USD
Debt and Liquidity
Net Cash: Fell by -$53.1 billion quarter-over-quarter (QoQ) and increased by $12.6 billion year-over-year (YoY).
Debt Issuance: Fell $43.9 billion QoQ and $13.5 billion YoY. Deposits are stable @ 4.157 trillion.
Liquidity: Is ostensibly flat QoQ and YoY at $1.857 trillion.
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.