Systematic Credit and Equity G-255 Trading Indicators for August 4, 2025
Good morning and a lot to unbuckle in 450 words.
Friday's 2.5% equity market decline widened credit spreads (+3 to +8bp), altering our systematic credit trading model's overnight output. While indicators shifted, the trading strategy remained unchanged.
Unprecedented tension between the US President and Federal Reserve Board of Governors typically signals risk market uncertainty. Yet, the $7 trillion cash hoard in US money funds sustains the "buy the dips" mentality.
US tariffs and government spending cuts, combined with corporate focus on shareholder returns, are driving a notable increase in corporate leverage post-2Q. The Smoot-Hawley Tariff Act of 1929-30 crippled international trade via retaliatory tariffs, slashing 1930 US GDP.
he 2025 US tariffs are proving to be as significant an obstacle to free market trade as those enacted in 1929. However, their impact on US GDP is notably less severe than in 1929, due to advancements in communication and information technology and the broader range of categories where the US maintains a trade deficit.
In 1937, the US economy experienced a sharp GDP contraction when the Roosevelt administration significantly reduced government spending.
Quantitative Macro economics indicates that US government spending generates a higher money multiplier than private sector spending, as government contracts instill greater confidence in recipient entities.
The combination of tariffs and government spending cuts is unprecedented. A few weeks ago, we used a sports analogy, a metaphorical no-no. We're now in the fourth inning of this contest, with tariffs and technology providers gaining ground while global corporations and the US economy face setbacks. Unlike the Hoover era, tariffs have not yet driven widespread price increases. Instead, consumer and government demand has softened or declined in all sectors except technology and healthcare.
Regarding US employment—don't shoot the messenger. "Too late." The corrections in the past two months' employment data are entirely expected, given historical "seasonal adjustments" for May and June. Typically, most government jobs terminated during these months reflect normal seasonal declines.
On balance sheet leverage, among the 169 largest US corporate debt issuers, net debt has risen by $1 trillion year-over-year, a 9% increase in leverage, while corporate revenue growth remains below 5%. The key question is when—not if—US credit rating agencies will reassess balance sheet leverage, as their preferred metric, "Debt to EBITDA," is under pressure, with over 40% of issuers reporting year-over-year EBITDA declines.
Earnings Summary (Week of August 1, 2025):
Of the 255 largest global corporate debt issuers, 63 are reducing leverage, while 81 are increasing net debt. Twenty-five issuers experienced balance sheet changes. Sixteen issuers that were deleveraging last quarter are now adding net debt, while nine that were re-levering after Q1 are now deleveraging at Q2's end. One hundred issuers have yet to report for the June–July fiscal period.
Sectors Reducing Debt/Adding Cash: (1) TMT (A and BBB), (2) Non-Nordic European Banks, (3) Global Autos.
Sectors Adding Most Net Debt: (1) A-rated Energy, (2) A-rated Consumer, (3) Big 6 Banks, (4) Aerospace and Defense (A and BBB).
Sectors Most Negatively Impacted by Tariffs: (1) Global Auto, (2) Global Consumer, (3) US Transports, (4) Healthcare, (5) Global Industrials.
Systematic Trading Model:
The model generates daily trading indicators for over 6,000 bonds. Currently, 752 bonds are within 20% of their 52-week tight or wide spread levels, 20% above historical averages.
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 135 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.48 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 and Mutual Funds last week for IG. HY inflows were mixed
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 unemployment rate rose from 4.1% in June to 4.2% in July. Our trading model uses weekly initial jobless claims as its primary labor output. Those indicators are at a 12 month low.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +13% above average
-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 76% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +17% above average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 57% of top 25 issuer volume and 46% of total TRACE volume.
Market Movement
U.S. CDX Index: +3bp @ 54 bp
U.S. IG Cash Spreads: Ranged from (+2 to +8bp) wider.
CDX HY Index: -.6 @ 106.6 (per Bloomberg)
HY Cash Bonds: No sector materially outperformed or underperformed Friday.
High-Yield Activity
- Dealers sold $1 bil of HY bonds Friday.
Most Bought HY Bonds
- Venture Global Partners (Ba2/BB+ attractive short)
Most Sold HY Bonds
- Newell Brands (NWL B1/B+)
Investment-Grade Activity
- Dealers sold $1.5 bil of IG bonds Friday.
Most Bought Sector: Big 6 banks
- Goldman Sachs (GS, A2/BBB+ attractive short)
- Wells Fargo (WFC, A1/BBB attractive short)
Most Sold Sector: Yankee banks
- Barclays (BACR, Baa1/BBB+ attractive long)
- SocGen (SocGen Baa2/BBB attractive long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 199 bonds ($288 billion) are considered undervalued by the stochastic credit trading model with 83 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1440 bonds ($1.15 trillion) are considered overvalued by the stochastic credit trading model with 669 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $726.2 billion in overvalued market capital across 289 bonds, with 95 short indicators.
Single A and BBB industrials $175.8 billion, in overvalued market capital across 153 bonds, with 84 short indicators.
Single A, BBB and BB energy $245 billion in overvalued market capital across 154 bonds, with 103 short indicators.
Single A Consumer $105.9 billion in overvalued market capital across 88 bonds, with 35 short indicators
Issuer News
64 earnings results reports in the past 4 days.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 58% 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 (140 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 rtes are +45.5 bp higher YoY and -32.5bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices were directionally correlated in Friday for the 116th time in 137 trading days. US bonds were unchanged while US equities were lower. 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
27 G-255 issuers sold 58 separate trades totaling $74.89 bil of new bonds. 62% of the new July supply was from non – financial issuers. YTD there have 201 G – 255 offerings totaling 498 separate trades and $662.49 billion of total market cap.
Corporate Bond Inflows: ETFs focused on corporate debt saw approximately $14 billion in inflows in July, encompassing both investment-grade and high-yield bonds.
Overall Mutual Find Bond Fund Inflows: Bond funds experienced strong inflows in July, indicating continued investor interest in fixed-income assets. Taxable bond funds saw estimated inflows of $10.49 billion. Investment grade funds had over $5.5 billion of inflow in July.
Systematic Trading Model Indicators and Strategy
Model Output
669 Attractive short indicators . The fewest since July 16.
83 attractive long indicators: The most since July 9.
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:
18 long trades reached their avoid trading levels in July and were replaced by 4 new issue indicators
Systematic Credit Trading Strategy August 4, 2025
Closed Positions: The long/ short basket trading exited the So Cal Ed First Mort (A2/A-) EIX 5.45 03/01/35 Friday
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 last week
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 Friday 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
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 1, 2025)
Total Trades: 138 (1% of total trades).
Performance Summary:
Long Indicators: 101/107 reached avoid-trading levels, tightening by -9.42 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 5 tightened by -.88 bp.
Remaining Shorts: 4 tightened by -15.28 bp.
Average Spread Movement: ±7.48 bp in the indicated direction.
Success Rate: 93% 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 timelines