Systematic Credit and Equity G-255 Trading Indicators for July 28, 2025
Systematic credit trading overview and model indicators
Good morning: Do you enjoy beer? Apparently, few people in Europe are willing to pay for a 6, 8, or 12-pack of Heineken at grocery stores. We highlight (HEIANA Baa1/A-) for two reasons: First, we observed similar challenges with PepsiCo's Frito Lay products two summers ago in the same grocery chains. PepsiCo has faced additional issues (e.g., Quaker Oats) since then. However, except for tobacco companies, major consumer issuers have historically relied on unit volume growth and above-inflation pricing to deliver strong shareholder returns.
In 2Q 2025, achieving 1% unit growth is notable for companies like Coca-Cola, PepsiCo, Nestlé, or Heineken. Yet, significantly reduced cash flow hasn't deterred these issuers from increasing balance sheet leverage to reward shareholders, even as cash flow declines by double digits.
Where are the rating agencies? Nowhere to be found. The 2 to 2.5x debt/EBITDA metric will require significant "adjustments."
Second, while markets celebrate trade tariff wins, 8 of the 255 largest issuers' equity prices have dropped over 10% month-over-month (often significantly more). Does this seem familiar? Yes, it does. Is it time to short credit?
To borrow a line from Trading Places: "Now, Louis? Not yet, Billy Ray." We discuss overvaluation in the credit market on page 3. We're not there yet, and earnings season is only halfway through. However, trades are starting to reflect attention to earnings—somewhat.
Was the trading model's equity indicator to buy HCA and Charter common after Friday's sell-off legitimate? There's a better than 67% chance both equities will rise more than 7.5% in the next 60 days, driven by positive year-over-year cash flow and cash usage trends.
To trigger a "short credit" indicator, we'd need equity indexes to decline, money to exit the credit market, and more bonds to hit short trading levels. First, we must see how the rest of earnings season unfolds.
Earnings Summary for the Week of August 1
Based on results reported this morning, 30 of the world's 255 largest corporate debt issuers are reducing leverage, while 47 are adding net debt—the widest interim disparity among major borrowers since 2012.
Thirteen issuers have seen balance sheet changes. Nine of the world's largest corporate balance sheets, which were trimming debt last quarter, are now adding net debt. Conversely, four of the 255 largest issuers that were re-levering after 1Q are now de-levering at the end of 2Q.
Sectors where issuers are reducing debt or adding cash? Thus far BBB TMT and Non – Nordic European Banks.
Sectors adding the most net debt? A rated Energy, A rated Consumer Big 6 banks and Aerospace and Defense issuers (Single A and BBB rated). Issuers not adding net debt (thus far)? Auto finance.
Sectors most negatively impacted by US Trade Tariffs? (1) US Auto (2) US Retail (3) US Consumer. (4) US transports. (5) All of healthcare.
We will have our weekly LQD output tomorrow and then our first Systematic Equity Trading / Credit Trading model output on Thursday.
G-255 Issuers reporting results Monday
Heineken (HEIANA Baa1/A- attractive short) Ugly
Enterprise Products (EPD A3/A- attractive short) Bef. Mkt
Systematic Trading Model Indicators and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 956 bonds are within 20% of their 52-week tight or wide spread levels, 69% above historical averages. Yesterday's earnings reports were the primary driver or more short indicators.
Current Trading Allocation Strategy
50% Long: Focus on undervalued, deleveraging bonds.
30% Short: Target overvalued bonds in re-levering sectors.
20% Front-End Allocation: 75% in floating-rate notes maturing within 3 years.
Performance: Of 135 long/short trades in 2025 (marked to market via TRACE), 91% achieved ±5 bp targets, averaging ±7.68 bp per trade.
Recent Activity: Short position additions paused on July 2, 2025, due to non-replaced long positions from late June to early July. Between June 30 and July 16, 2025, 17 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. 4 new attractive long new-issue indicators were published this week. Last week saw a recovery in US mutual fund corporate bonds (both IG and HY) inflow.
Sector Trading Indicators
Long Opportunities:
Yankee Banks (especially floating-rate notes).
Single A and BBB TMT
Short Opportunities:
U.S. Big 6 Money Center Banks.
Single A, BBB and BB Energy issuers re-levering
All Energy (Single A, BBB and BB)
Single A Consumer
Single A and BBB Industrials (re-levering, tight spreads).
Risk Management
The model avoids adding risk to G-255 issuers scheduled to report results within 30 days, complying with global regulatory requirements for reporting material events.
Inflation, Economic Data, and Interest Rates
While we are going to read and hear opinion after opinion about the Fed, interest rates the impact of trade tariffs. However, most of the action as it relates to the US treasury market this week will be focused on Friday's US non- farm payroll data. We will also see core PCE on Wednesday as well its components. This will give more insight about impact of trade tariffs on US inflation.
Has the Fed ever lowered interest rates when the unemployment rate was 4.1%? Only in times of crisis.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +3% above average
-G-255 Issuers: 92 of the top 100 traded issuer bonds accounted for 94% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +10% above average
-G-255 Issuers: 16 of the top 25 traded bonds accounted for 58% of top 25 issuer volume and 50% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged @ 50 bp
U.S. IG Cash Spreads: Ranged from (+1bp) wider to (-4bp) tighter; Single and BBB US financials underperformed. No trading sector was wider on Friday.
CDX HY Index: unchanged @ 107.6 (per Bloomberg)
HY Cash Bonds: HY TMT and Energy underperformed on Friday. Utilities were the strongest performer.
High-Yield Activity
- Dealers bought $ 1.5 billion of HY bonds Friday.
Most Bought HY Bonds
- Warnermedia Holdings (WBD Ba3/BB attractive long)
Most Sold HY Bonds
- Albertsons (ACI Ba2/BB+)
Investment-Grade Activity
- Dealers bought $700mm of IG bonds Friday.
Most Sold Sector: BBB TMT
- ATT (HCA, Baa3/BBB- attractive short)
- Broadcom (AVGO, Baa1/BBB+ attractive long)
Most Bought Sector: Yankee Banks
- UBS (UBS, A2/A- attractive long)
- Sumitomo Finance (SUMIBK A1/A- attractive Long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 160 bonds ($227.8 billion) are considered undervalued by the stochastic credit trading model with 65 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1477 bonds ($1.55 trillion) are considered overvalued by the stochastic credit trading model with 891 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $737 billion in overvalued market capital across 296 bonds, with 183 short indicators.
Single A and BBB industrials $183.9 billion, in overvalued market capital across 149 bonds, with 88 short indicators.
Single A, BBB and BB energy $241.7.billion in overvalued market capital across 161 bonds, with 112 short indicators.
Single A Consumer $107.3 billion in overvalued market capital across 89 bonds, with 56 short indicators
Issuer News
Volkswagen (Baa1/BBB+ attractive short) reported results Friday (see attached earnings digest). Audi lowered its financial outlook for 2025 tariffs and restructuring costs. Audi lowered guidance for return on sales to 5% to 7% from 7% to 9% prior.
Union Pacific Corp (A3/A- attractive short ) is said to be within days of acquiring Norfolk Southern (NSC Baa1/BBB+ attractive short ). Both issuers have reported results and the systematic trading model indicator is to short bonds of either issuer. UNP equity is a long trade at its current $225/share price.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 59% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: U.S. credit remains overvalued based on output from our credit trading model. Given the number of issuers re-levering (137 of the world's largest 255 corporates at present) we would need to see the number of systematic short trade indicator reach 1,100 before the overall valuation indicator would reach "extremely overvalued"
2025 10 year credit spreads: Are now minimally wider YoY.
UST 10Y rates are +19.8 bp higher YoY and -19.7bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 64th trading day in 73. While credit spread movement has an 80% correlation to the equity price movement, the magnitude of these moves has changes markedly over the past 2 years. This owes to the world's largest corporates using balance sheet to fund equity share repurchase and dividend payout
New Supply, Bond Maturities, and Credit Fund Inflows for July
No new G – 255 supply in any currency On Friday. 9 G-255 issuers sold 18 bonds last week totaling $19.1 billion in market capitalization. 5 of the bonds sold last week total $4.75 billion in market cap have already reached our systematic trading model indicator avoid trading level.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 891. 27 more than Friday.
65 attractive long indicators: 5 more than Friday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for new issue long positions is 10 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 70% long hurdle, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
17 long trades have reached their avoid trading levels in July and thus far, have been replaced by 4 new issue indicators
Systematic Credit Trading Strategy July 25, 2025
Closed Positions: The long/ short basket trading exited the ATT (Baa2/BBB) T 5 3/8 08/15/35 and the Mizuho (A1/A) MIZUHO 5.422 05/13/36 reached its reached its avoid trading level on Friday
Enter New Longs: Trading model indicators added GE Aerospace (A3/A-) GE 4.9 01/29/36 on Tuesday
Monitor Trade Position (Portfolio) Composition:
Track the percentage of long positions relative to the total portfolio.
If replacing the long positions that have reached their avoid trading level pushes the portfolio above the 70% 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 today's fund flow data to ensure alignment with the systematic model.
Basket Trade long/short Monday – 60%
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 Basket bond trades based on trading strategy
ATT (Baa2/BBB) T 5 3/8 08/15/35 reached its reached its avoid trading level on Friday
Mizuho (A1/A) MIZUHO 5.422 05/13/36 reached its reached its avoid trading level on Friday
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 25, 2025)
Total Trades: 135 (1% of total trades).
Performance Summary:
Long Indicators: 96/104 reached avoid-trading levels, tightening by -9.45 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 9 tightened by -8.86 bp.
Remaining Shorts: 4 tightened by -18.72 bp.
Average Spread Movement: ±7.77 bp in the indicated direction.
Success Rate: 81% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (22 trading days) + 17% above normal.
The earnings report we missed last week (1) Dow reported Thursday the 24th.
Dow(DOW, Baa2/BBB, attractive short) Earnings Summary: Dow reported 2Q revenue fell 7.4% YoY, and net earnings that were a loss of -$800mm.
• 2Q Specialty plastics revenue fell -5% YoY
• 2Q Industrial intermediates revenue fell -6% YoY
• 2Q Performance Coatings revenue fell - 5% YoY
• 2H While Dow cut their dividend, they did not see a material recovery from their first half loss going forward for 2025.
Financial Position:
• 1H Cashflow from operations was -$470mm v. $832mm in 1H 2024.
• 1H free cash flow -$1.714 bil. While dividends and share repurchases fell -$200mm to $985mm .
• Overall Dow net debt fell by $707mm QoQ and rose $1.371 bil to $14.4 bilr.
Trading Model Indicator: There are 16 secondary liquid USD DOW bonds and only 2 have overvalued trade indicators from our systematic model. No DOW bonds have attractive short trading indicators.
Equity Indicator: The trading model sees (DOW) equity as a short trade at $30.50/share.
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.