Systematic Credit and Equity G-255 Trading Indicators for August 12, 2025
Good morning! Today is Tuesday, August 12, and I am 95% confident we will see CPI data later this morning. Our work is entirely quantitative, and the only element I need to ensure accuracy on is the date when the electricity goes out. I erred yesterday by delving into details, stating that regardless of the CPI outcome, the US Federal Reserve will likely cut its overnight lending rate at its September 17 meeting. Our quantitative conclusion from yesterday's report indicated that lower Federal Reserve overnight lending rates typically result in lower equity prices and wider US credit spreads. This historical data remains unchanged despite my calendar misstep.
Only one earnings report came from a major corporate debt issuer. Celanese (CE Ba1, BB+ attractive short) reported results that triggered our systematic trading model to indicate long equity/short CE bonds. This trade indication has appeared 59 times among the 189 issuers reporting results this earnings season.
We are still awaiting reports from major US retailers, Canadian banks, and several Technology and Transport issuers with January or April fiscal years.
While credit is reportedly overvalued, neither large-cap high-yield nor investment-grade bond valuations are near their March or November 2024 levels, so our trading model has not flagged a "significantly overvalued" market indicator. The model has yet to produce 10Y subordinated short trading indicators for Big 6 banks or 5–10 short indicators for Ford (F), General Motors (GM), or Volkswagen (VW). Historically, these credits often lead to wider valuations, but they have not yet reached extreme overvalued trading levels.
Moving to sector 4 in our earnings review: French Banks
French Bank G-255 issuers 2Q 2025 Sector Operating Metrics
French Banks vs. US and UK Banks
Here's a comparative analysis of key operating metrics for French Banks, the 19 US banks, and the 7 large UK banks:
Size Comparison
Big 6 banks are approximately 30% larger than the top 4 French banks, while the top 13 US regional banks have about 20% fewer assets combined than France's largest banks.
The 7 large UK banks represent roughly 85% of the asset size of France's top 4 banks.
Capital Strength
French banks hold ~150 basis points higher CET1 equity capital (13.5%) compared to the 19 US banks and roughly the same CET1 capital as UK banks.
Revenue Growth
French banks' 4% YoY growth is slightly below UK and US regional banks but higher than US Big 6 banks.
Loan Growth
French banks' 2% loan growth is lower than all compared banking regions.
Shareholder Returns
Since BPCE Group is state-owned and Crédit Agricole did not repurchase equity in 2025, no comparison exists for French banks' shareholder returns versus other banking sectors.
French Bank G-255 issuers 2Q 2025 Sector Balance Sheet
French Banks vs. US and UK banks: 2Q 2025 Balance Sheet Metrics
Liquidity
French Banks have more liquidity than any other banking sector in the world with the exception of Japan's 3 largest banks.
Debt Levels
Short-Term Debt: as a % of balance sheet French banks have roughly (10%) less short term debt than US or UK banks.
Long-Term Debt: French banks roughly the same level of debt as US and UK banks.
Net Debt/Cash Position
Big 6 banks: ~$1 trillion in net debt.
Regional banks: ~$55 billion in net cash.
UK banks have £220 billion in net cash
French banks have USD equivalent of $175 billion in cash
Systematic Trading Model:
Similar to US Big 6 banks, a decline in US interest rates (which has already taken place in Europe) will impact reported French Bank earnings, but to a lesser extent than it will US and UK bank earnings.
Given that there are no large cap re-levering French Banks, the trading model indicators have just 4 attractive long trade indicators. However, new issue performance of French bank bonds has outperformed all other financial sectors in 2025.
Trading Allocation Strategy:
50% Long: Undervalued, deleveraging bonds.
30% Short: Overvalued bonds in re-levering sectors.
20% Front-End: 75% in floating-rate notes (<3 years).
Performance: Of 143 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.51 bp per trade.
Recent Activity: Between June 30 and August 8, 2025, 20 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. We saw strong inflows into US corporate bond ETFs and Mutual Funds for IG last week. The trading model added another new issue long trade on Monday.
Risk Management:
The model avoids adding risk to G-255 issuers reporting within 30 days, adhering to global regulatory requirements for material events.
Inflation, Economic Data, and Interest Rates
We will get CPI data (for real!) today with little change expected in the numbers.
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -12% Below average
-G-255 Issuers: 91 of the top 100 traded issuer bonds accounted for 85% of top 100 issuer volume and 64% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +15% above average
-G-255 Issuers: 13 of the top 25 traded bonds accounted for 51% of top 25 issuer volume and 44% of total TRACE volume.
Market Movement
U.S. CDX Index: +.5bp @ 51.5bp
U.S. IG Cash Spreads: were (-1bp) tighter to unchanged.
CDX HY Index: -.1 @ 107.1 (per Bloomberg).
HY Cash Bonds: Healthcare outperformed for a third day in four Monday. Energy bonds were slightly lower.
High-Yield Activity
- Dealers bought $1.3 bil of HY bonds Monday.
Most Bought HY Bonds
- Ecopetrol (ECOPET Ba1/BB attractive long)
Most Sold HY Bonds
- Gray Media (GTN Ba3/B+)
Investment-Grade Activity
- Dealers purchased $1.2bil of IG bonds Monday.
Most Bought Sector: Yankee Banks
- Barclays LLC (BACR, Baa1/BBB+ attractive long)
- UBS (UBS, A2/A- attractive short)
Most Sold Sector: BBB Energy
- MPLX (MPLX, Baa2/BBB attractive long)
- Energy Transfer (ET Baa2/BBB attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, Single A rated global Autos, BBB TMT, BBB Energy, and Euro Yankee Banks. Overall model indicators 154 bonds ($216.6 billion) are considered undervalued by the stochastic credit trading model, with 58 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1500 bonds ($1.4 trillion) are considered overvalued by the stochastic credit trading model with 832
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $746.2 billion in overvalued market capital across 296 bonds, with 137 short indicators.
Single A and BBB industrials: $161.6 billion, in overvalued market capital across 138 bonds, with 92 short indicators.
Single A and BB energy $145.8 billion in overvalued market capital across 94 bonds, with 64 short indicators.
Single A Consumer $114.5 billion in overvalued market capital across 96 bonds, with 56 short indicators.
Issuer News
Among the 255 largest global corporate debt issuers, 90 are reducing leverage, while 99 are increasing net debt. Twenty-six issuers saw balance sheet changes. Sixteen previously deleveraging issuers are now adding net debt, while ten re-leveraging after Q1 are now deleveraging at Q2's end. Fifty-Five issuers are yet to report for June–August.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 42% 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 tighter YoY and wider YTD.
UST 10Y rates are +37.7 bp higher YoY and -28.6 bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices did not correlate for a second consecutive trading day on Monday with the S&P and Dow Jones industrials lower and credit spreads unchanged to tighter. While HY prices were higher. While credit spread movement has an 80% correlation with equity price movement, the magnitude of these moves has changed markedly over the past two years. This owes to the world's largest corporates using balance sheet to fund equity share repurchases and dividend payouts
New Supply, Bond Maturities, and Credit Fund Inflows for August
Monday saw a continuation of last week's well-priced new supply, with five G-255 issuers selling 16 bonds totaling $13.4 billion. One additional issuer, CVS Health (Baa3/BBB), trimming its balance sheet, became the sixth post-earnings corporation with an attractive balance sheet to issue bonds. The $750 million CVS 5% 09/15/32 bond was deemed the most attractive long CVS indicator by our trading model, while the two Energy Transfer (ET Baa3/BB+) junior subordinated bonds exhibited the strongest attractive long indicators in our trading model.
Year-to-Date Issuance: G-255 supply has surpassed $700 billion for the year. Alongside $8 billion of inflows this month, $14.4 billion in maturities and bonds called have provided support for new G-255 credit supply.
Systematic Trading Model Indicators and Strategy
Model Output
832 Attractive short indicators . 2 more than Monday and 53% above the 200 day moving average.
58 attractive long indicators: -5 from Monday
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:
19 long trades reached their avoid trading levels in the past 35 days and were replaced by 9 new issue indicators
Systematic Credit Trading Strategy August 12, 2025
Closed Positions: Last week long/ short basket trading exited the Mercedez Benz (A3/A-) MBBGR FRN 4/1/27.
Enter New Longs: On Monday indicator added CVS (Baa3/BBB) CVS 5 9/15/32 as a new issue long trade.
Enter New Short trades: Last week the trading model added Truist Bank subordinated (A3/A-) TFC 2 1/4 03/11/30.
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.
Monda Basket Trade long/ short ratio 66%
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
On Monday the trading model added the new issue CVS (Baa3/BBB) CVS 5 09/15/32 as a long traded
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 11, 2025)
Total Trades: 143 (1% of total trades).
Performance Summary:
Long Indicators: 102/111 reached avoid-trading levels, tightening by -9.41 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 9 tightened by -4.55 bp.
Remaining Shorts: 5 tightened by -14.43 bp.
Average Spread Movement: ±7.53 bp in the indicated direction.
Success Rate: 92% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (21 trading days) normal.
Monday's Earnings Report:
Celanese (CE Ba1/BB+ avoid long) Earnings Summary: Celanese 2Q revenue that fell -1% YoY and operating income that fell -6% YoY.
• 2Q Acetyl revenue fell 1% YoY with volumes up 2%
• 2Q Engineered Materials revenue rose 12% with volumes growing 3%.
Financial Position:
• 1H free cashflow was $252mm v. $151mm 1H 2024.
• 1H cashflow was $447mm vs $393mm.
• CE net debt is flat YoY @ $11.9 billion.
Trading Model Indicator: There are 9 liquid CE secondary USD bonds that total $9.3 billion. 3 of those bonds have overvalued trading indicators from our systematic credit trading model. None have short trading indicators.
Equity Indicator: CE equity is an attractive long @ at its current $47.42 per 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.