Systematic Credit and Equity G-255 Trading Indicators for July 31, 2025
Good morning: While strategists, analysts, and interest rate forecasters continue to speculate on the timing of the next Fed rate cut, 32 of the world's largest issuers have reported results this week, with another 25 scheduled to report today.
On rate cuts, we focus on quantitative stochastics. The US Federal Reserve has only cut its overnight lending rate three times in the modern era (since 1977) when unemployment was 4.1% or lower, all related to COVID. Historically, US unemployment has rarely been this low for an extended period. Thus, unless the US President removes the Fed Chair before his term expires, the next rate cut is likely when unemployment reaches 4.4% or a new Fed Chairman is appointed, whichever occurs first.
We observed significant inflows into US corporate bond ETFs for the week ended July 29, with $33 billion of G-255 bonds maturing this month and below-average July new supply from the globe's largest issuers. This suggests tighter, not wider, US credit spreads or HY valuation.
Finally, we are now including our US equity trading model indicators in the July 29 and July earnings digests and will begin providing equity and debt stochastics on Monday.
Recap of the past 2 days (30 issuers) of G-255 reports:
• 6 indicators: sell the equity and sell the bonds.
• 8 indicators: sell the bonds and go long the stock.
• 15 indicators: long bonds and the stock.
With valuations stretched, only 9 equity indicators were at executable prices.
• No actual long bond indicators.
• 16 undervalued long indicators.
• 58 overvalued short indicators.
• 120 attractive short indicators.
These outputs will be updated daily, with a summary provided.
Please see the attached 29 July earnings digest for high-level indicators and brief write-ups for each issuer. The July 30 earnings digest will be sent within the next 30 minutes.
Earnings Summary for the Week of August 1
Based on results reported this morning, 46 of the world's 255 largest corporate debt issuers are reducing leverage, while 65 are adding net debt—the widest interim disparity among major borrowers since 2012.
Nineteen issuers have seen balance sheet changes. Thirteen of the world's largest corporate balance sheets, which were trimming debt last quarter, are now adding net debt. Conversely, seven 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?
(1) TMT (both Single A and BBB), (2) Non-Nordic European Banks.
Sectors adding the most net debt?
(1) A-rated Energy, (2) A-rated Consumer, (3) Big 6 banks, (4) Aerospace and Defense issuers (Single A and BBB-rated).
Issuers not adding net debt? (1) Auto finance.
Sectors most negatively impacted by US Trade Tariffs?
(1) US Auto, (2) Global Auto, (3) US Consumer, (4) US Transports, (5) All of healthcare.
Systematic Trading Model Indicators and Strategy
The Systematic Trading Model generates trading indicators for over 6,000 bonds daily. Currently, 942 bonds are within 20% of their 52-week tight or wide spread levels, 61% above historical averages.
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), 92% achieved ±5 bp targets, averaging ±8.54 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 28, 2025, 19 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. There were strong inflows into US Bond ETFs last week.
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
The US Federal Reserve held their overnight lending rate to US banks at 4.25% but changed their language to accommodate a growing, but slowing US economy.
US GDP rose at 3.0% in 2Q 2025.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: + above average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 77% of total TRACE volume.
High-Yield (HY) Trading
-Volume: average
-G-255 Issuers: 14 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 46% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged @ 50.7 bp
U.S. IG Cash Spreads: Ranged from (+2bp) wider to (-2bp) tighter; Single A and BBB US financials outperformed. Single and BBB TMT underperformed Wednesday.
CDX HY Index: unchanged @ 107.3 (per Bloomberg)
HY Cash Bonds: HY financials outperformed. HY TMT underperformed Wednesday.
High-Yield Activity
- Dealers did not buy or sell HY bonds Wednesday.
Most Bought HY Bonds
- EchoStar (SATS Caa1/B attractive short)
Most Sold HY Bonds
- Owens-Brockway (OI B2/B+)
Investment-Grade Activity
- Dealers did not buy or sell IG bonds Wednesday.
Most Sold Sector: Big 6 banks
- Bank of America (BAC, A1/A- attractive short)
- Morgan Stanley (MS, A1/A- attractive short)
Most Bought Sector: Autos
- General Motors (GM, Baa2/BBB attractive short)
- Ford (F Ba1/BBB- attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 143 bonds ($199.7 billion) are considered undervalued by the stochastic credit trading model with 51 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1485 bonds ($1.55 trillion) are considered overvalued by the stochastic credit trading model with 899 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $748.2 billion in overvalued market capital across 299 bonds, with 180 short indicators.
Single A and BBB industrials $186 billion, in overvalued market capital across 150 bonds, with 101 short indicators.
Single A, BBB and BB energy $242.9 billion in overvalued market capital across 162 bonds, with 108 short indicators.
Single A Consumer $107.6 billion in overvalued market capital across 89 bonds, with 58 short indicators
Issuer News
31 earning results reports in the past 2 days.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 57% 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 (138 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 tighter YoY but still materially wider YTD.
UST 10Y rates are +32.6 bp higher YoY and -21.3bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 67th trading day in 76. 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
On Tuesday Next Era Energy sold $1.998 billion of 3Y bonds that tightened by -6 bp in the first several trades. This demonstrates front – end non – financial market demand .
New issue DB 4.95 08/04/31 and RY 4.696 08/06/31 which the trading model consider considered the most attractive owing to trading liquidity on Monday have lagged.
Investments in US-listed fixed income exchange-traded funds more than doubled in the past week for the 16th straight week of inflows. Broad bond-market ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week.
Net inflows to ETFs totaled $7.66b in the week ended July 29, 2025
Broad bond-market ETFs expanded by $635.7m to $2.87b
Corporate bond ETFs narrowed by $2.19b to outflows of $15m
Investment-grade ETFs swung by $5.55b to $5.39b, and high-yield ETFs dropped by $1.07b to $63.1m
Net inflows totaled $201b year-to-date
IShares 20+ Year Treasury Bond ETF had the biggest inflow, of $579.9m
IShares iBoxx $ High Yield Corporate Bond ETF had the biggest outflow, of $707.5m
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 889. 29 more Week over week.
53 attractive long indicators: 14 fewer WoW.
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 30, 2025
Closed Positions: The long/ short basket trading exited the GE Aerospace (A3/A-) GE 4.9 01/29/36 reached its avoid trading level on Monday
Enter New Longs: Trading model indicators added Royal Bank of Canada (A1/A) RY 4.696 08/06/31 and Deutsche Bank NY (Baa1/BBB+) DB 4.95 08/04/31 as long trades on Monday
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 Wednesday – 70%
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
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 30, 2025)
Total Trades: 138 (1% of total trades).
Performance Summary:
Long Indicators: 100/107 reached avoid-trading levels, tightening by -9.37 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 7 tightened by -5.37 bp.
Remaining Shorts: 4 tightened by -15.82 bp.
Average Spread Movement: ±8.54 bp in the indicated direction.
Success Rate: 92% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (21 trading days) + 12% 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.