Systematic Credit and Equity G-255 Trading Indicators for July 21, 2025
Good morning! I hope everyone enjoyed a great weekend. This week, we're reviewing 31 earnings reports (with one miss noted below), fresh market and fund flow data, and 12,000 new indicators from our systematic credit trading model.
Earnings Summary for the Week of July 17
Of the 31 issuers reporting earnings, 11 are actively paying down debt. Notably, 4 issuers (all banks) previously deleveraging have shifted to re-leveraging, while 2 issuers (both banks) previously re-leveraging are now de-leveraging.
Total net debt for the world's 255 largest corporate borrowers has increased by $100 billion quarter-over-quarter (QoQ) and $1.1 trillion year-over-year (YoY) based on these 31 reports. Comprehensive cash flow data will be available once 10-Qs are filed.
Missed Issuer: Novartis
We missed reporting on Novartis (NOVNVX, Aa3/AA-, attractive short). Details are on page 6 of the full report. Over the past 12 months, Novartis has distributed over $15 billion through share repurchases and dividends. Second-quarter earnings rose 25% YoY, driven by similar revenue growth. However, NOVNSW equity has delivered less than a 2% total return over the past year, primarily due to market concerns over potential U.S. tariff impacts. The NOVNVX 4.2 09/18/34 bond, issued at 67/10Y last September, is now trading at 42/10Y.
Trading Model Indicator: Short the NOVNVX bond and buy the NOVNSW stock.
Upcoming Earnings
This week, 40 issuers will report earnings, including Verizon (VZ, Baa1/BBB+, attractive long) this morning.
Weekly LQD Systematic trading model output
The LQD ETF experienced fund outflows for three consecutive days last week. Our model detected the following shifts in holdings:
• Big 6 Banks: Reduced percentage holdings.
• BBB TMT: Increased exposure.
• Single A Consumer: Decreased exposure.
• BBB Consumer: Increased exposure.
• Utilities: Slightly increased exposure.
The model indicator show 504 LQD holdings as attractive shorts this week, up from 306 last week, indicating a rise in perceived overvaluation. The LQD has exhibited lower volatility compared to peers, partly due to strategic trades like the addition of the Morgan Stanley (MS) 4.734 07/18/31 bond—one of only two bank new issues added last week. This bond aligns with the ETF's trading strategy, increasing BBB exposure while managing spread risk effectively.
Systematic Trading Model Insights and Strategy
Currently, 862 bonds are within 20% of their 52-week tight or wide spread levels, 54% above historical averages. We saw Single A rated credit spreads move wider from 52 week tight for a second day on Friday. Thursday's fund flow data leaves current trading allocation unchanged since July 10.
Current Trading Allocation Strategy
57% Long: Focus on undervalued, deleveraging bonds.
23% Short: Target overvalued bonds in re-levering sectors.
20% Front-End Allocation: 75% in floating-rate notes maturing within 3 years.
Performance: Of 133 long/short trades in 2025 (marked to market via TRACE), 90% achieved ±5 bp targets, averaging ±7.64 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, 13 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. 3 new attractive long new-issue indicators were published last week.
Sector Trading Indicators
Long Opportunities:
Yankee Banks (especially floating-rate notes).
Single A TMT
Short Opportunities:
U.S. Big 6 Money Center Banks.
Single A and BBB Energy issuers re-levering
Single A and BBB Industrials (re-levering, tight spreads).
BBB TMT (larger tech issuers re-levering).
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
University of Michigan consumer sentiment index for July rose slightly to 61.8 from June's 60.7 reading
1 year inflation expectations dropped significantly from 5.0% to 4.4% MoM.
5 year inflation expectation dropped to 3.6% from 4.0%.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -13% below average
-G-255 Issuers: 95 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: -3% below average
-G-255 Issuers: 17 of the top 25 traded bonds accounted for 66% of top 25 issuer volume and 56% of total TRACE volume.
Market Movement
U.S. CDX Index: was unchanged @ 51 bp
U.S. IG Cash Spreads: widened in single A rated healthcare. Most other sectors were unchanged.
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CDX HY Index: was unchanged @ 107.5 (per Bloomberg)
HY Cash Bonds: BB TMT underperformed. Most sectors were unchanged.
High-Yield Activity
- Dealers bought roughly $300mm of HY bonds on Friday.
Most Bought HY Bonds
- Park Ohio Industries (PKOH Caa1/B-)
Most Sold HY Bonds
- CCO Holdings (CHTR B1/BB- attractive long)
Investment-Grade Activity
- Dealers bought roughly $300mm of HY bonds on Friday.
Most Sold Sector: None
- Morgan Stanley Bank new issue (MS Aa3/A+, new issues seen as attractive by our trading model).
Most Bought Sector: BBB TMT
- Oracle Corp (ORCL .Baa2/BBB attractive short)
- Broadcom (AVGO, Baa1/BBB+ attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers Overall model indicators 186 bonds ($273 billion) are considered undervalued by the stochastic credit trading model with 75 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1421 bonds ($1.43 trillion) are considered overvalued by the stochastic credit trading model with 788 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $725 billion in overvalued market capital across 290 bonds, with 160 short indicators.
BBB TMT $211 billion in overvalued market capital across 127 bonds, with 56 short indicators.
Single A and BBB industrials $151.7 billion in overvalued market capital across 122 bonds, with 69 short indicators.
Single A and BBB energy $180.3 billion in overvalued market capital across 136 bonds, with 95 short indicators.
Issuer News
None over the weekend
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 47% 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.
2025 credit spreads: Are wider YTD and YoY
UST 10Y rates are -18 bp lower YTD and +13.2bp higher YoY (apologies for Friday's error).
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices were both unchanged on Friday. 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 Friday. Month to date 12 issuers have sold 29 separate trades totaling $44.65 bil. The average spread tightening for those trades has been -6.1bp USD G-255 new supply is roughly twice the number of trades in market cap sold in the UK and Europe this month.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 788. 74 more than Friday.
74 attractive long indicators: 16 more than Friday.
Systematic Portfolio Trading Model Indicators:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for 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 75% long hurdle, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
12 long trades have reached their avoid trading levels in July and thus far, have been replaced by 3 new issue indicators
Systematic Credit Trading Strategy July 21, 2025
Closed Positions: The model exited the Broadcom (Baa2/BBB) AVGO 5.2 07/15/35 on Wednesday
Enter New Longs: On Friday the model added: PNC Corp (A3.A) PNC 5.373 07/21/36
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 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 today'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 Basket bond trades based on trading strategy
No new trades this morning
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 18, 2025)
Total Trades: 133 (1% of total trades).
Performance Summary:
Long Indicators: 93/102 reached avoid-trading levels, tightening by -9.54 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 9 tightened by -5.35 bp.
Remaining Shorts: 4 tightened by -14.75 bp.
Average Spread Movement: ±7.64 bp in the indicated direction.
Success Rate: 90% of indicators reached avoid-trading levels which is normal.
Average trade holding period: (22 trading days) + 17% above normal.
Earnings summary for G -255 issuers missed last week:
Novartis (NOVNVX, Aa3/AA-, attractive short) Earnings Summary: Novartis 2Q sales were $14.1 billion (+12%), with volume contributing 12% YoY growth. Operating income was $4.9 billion (+21%).Operating
margin was 34.6% + 2.5% YoY
Financial Position:
• Liquidity fell $200mm QoQ and $1.4 bil YoY.
• ST debt rose $500mm QoQ and $$780mm YoY while net debt rose by $1.5 billion QoQ
• LT debt rose $800mm QoQ and $2.7 billion YoY.
• Net debt rose 24% YoY to $23.8 billion.
Novartis returned over $10 bil to shareholders in the first half of 2025.
Trading Model Indicator: There are 12 liquid Novartis USD secondary bonds in circulation. The trading model indicator show all but 3 Novartis (NOVNVX) bonds as overvalued and 2 as attractive shorts. The model attractive Novartis short is the NOVNVX 4.2 09/18/34.
Equity Indicator: The systematic trading model views NOVN SW an attractive long trade at its current CHF 92.29 share price.
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.