Systematic Credit and Equity G-255 Trading Indicators for August 11, 2025
Good morning! Today marks the release of the first significant US government data point following the US jobs report on August 1, 2025, and the recent change in Federal Reserve leadership (Adriana Kugler replacing Stephen Miran). Recent headlines from Bloomberg and other financial outlets have raised eyebrows, prompting scrutiny of the data and narratives circulating in the market.
Key Observations
Skepticism Surrounding Government Data
Questions have been raised about the reliability of economic data disseminated by the current administration, particularly after the White House's response to the July Non-Farm Payroll (NFP) data. The Trump administration's history of selectively framing economic narratives warrants caution when interpreting official figures.Bloomberg's Questionable Narrative
Bloomberg, a leading repository of economic and market data, recently suggested that Federal Reserve rate cuts could drive stock prices higher, despite stocks already trading at all-time highs. This claim is puzzling, as historical data shows a significant negative correlation between Federal Reserve rate cuts and stock price movements 30–60 days forward. Hence the Bloomberg articles lack comprehension.2Q 2025 Sector Earnings and Balance Sheet Review
This update focuses on the third installment of second-quarter sector operating earnings and balance sheet metrics, with a particular emphasis on US Regional Banks (255 issuers) compared to the Big 6 banks.
US Regional Bank G-255 issuers 2Q 2025 Sector Operating Metrics
US Regional Banks vs. Big 6 Banks: 2Q 2025 Operating Metrics
Here's a comparative analysis of key operating metrics for US Regional Banks (top 13) and the Big 6 banks:
Size Comparison
Big 6 banks are approximately twice the size of the top 13 US regional banks in terms of total assets.
Capital Strength
Big 6 banks maintain ~250 basis points higher CET1 equity capital (12.5%) compared to regional banks.
Revenue Growth
Regional banks: 7% year-over-year (YoY).
Big 6 banks: 0% YoY.
Loan Growth
Regional banks: 8% YoY.
Big 6 banks: 5% YoY.
Shareholder Returns
Both regional and Big 6 banks saw a 16% YoY increase in returns to shareholders.
US Regional Bank G-255 issuers 2Q 2025 Sector Balance Sheet
US Regional Banks vs. Big 6 Banks: 2Q 2025 Balance Sheet Metrics
Balance sheet comparisons reveal stark differences:
Size
Big 6 banks are roughly twice the size of the top 13 regional banks across most categories.
Cash Holdings
Cash positions are comparable between the two groups, with minimal differences.
Debt Levels
Short-Term Debt: Big 6 banks hold ~4x as much short-term debt as regional banks.
Long-Term Debt: Big 6 banks have ~3.5x as much long-term debt as regional banks.
Net Debt/Cash Position
Big 6 banks: ~$1 trillion in net debt.
Regional banks: ~$55 billion in net cash.
Systematic Trading Model:
Now where was I? Ahh yes, Lower interest rates and securities prices.
Interest Rates and Securities Prices
A potential Federal Reserve rate cut of 25–50 basis points in September 2025 could have significant implications for bank earnings, with disproportionate effects on Big 6 banks compared to regional banks. Key points:
• Net Interest Margin (NIM): Lower interest rates will compress NIMs for both groups, but the Big 6 banks will face a greater impact due to their higher debt levels and balance sheet composition.
• Earnings Sensitivity: The negative correlation between asset price movements and overnight interest rate changes will lead to a more pronounced decline in balance sheet earnings for Big 6 banks compared to regional banks.
The model generates daily indicators for over 6,000 bonds. Currently, 835 bonds ($1.24 trillion) are within 20% of their 52-week tight or wide spread levels, 46% 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 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 4, 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.
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 on today with little change expected in the numbers.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -9% Below average
-G-255 Issuers: 95 of the top 100 traded issuer bonds accounted for 93% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -1-% below average
-G-255 Issuers: 8 of the top 25 traded bonds accounted for 20% of top 25 issuer volume and 22% of total TRACE volume.
Market Movement
U.S. CDX Index: -1bp @ 51bp
U.S. IG Cash Spreads: were unchanged to (+1bp) wider.
CDX HY Index: +.2 @ 107.2 (per Bloomberg).
HY Cash Bonds: Consumer and Healthcare outperformed Friday. No trading sector was lower.
High-Yield Activity
- Dealers bought $900 mm of HY bonds Friday.
Most Bought HY Bonds
- Herc Holdings (HRI Ba3/BB-)
Most Sold HY Bonds
- Under Armour (UA B1/BB-)
Investment-Grade Activity
- Dealers sold $200mm of IG bonds Friday.
Most Bought Sector: Yankee Banks
- Royal Bank of Canada (RY, A1/A attractive long)
- UBS (UBS, A2/A- attractive short)
Most Sold Sector: BBB Energy
- MPLX (MPLX, Baa2/BBB attractive long)
- Oneok (OKE 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 158 bonds ($218.3 billion) are considered undervalued by the stochastic credit trading model, with 63 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1447 bonds ($1.29 trillion) are considered overvalued by the stochastic credit trading model with 770
attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $735.8 billion in overvalued market capital across 294 bonds, with 131 short indicators.
Single A and BBB industrials: $157.4 billion, in overvalued market capital across 134 bonds, with 90 short indicators.
Single A and BB energy $156 billion in overvalued market capital across 89 bonds, with 62 short indicators.
Single A Consumer $110.2 billion in overvalued market capital across 93 bonds, with 52 short indicators.
Issuer News
Among the 255 largest global corporate debt issuers, 90 are reducing leverage, while 98 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 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. 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 and wider YTD.
UST 10Y rates are +35.2 bp higher YoY and -31.3bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices did not correlate on Friday with the S&P and Dow Jones industrials higher and credit spreads unchanged to wider. 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
J MPLX (MPLX Baa2/BBB) was the long G-255 issuer on Thursday. The front-end MPLX bonds were priced attractively according to our trading model. MTD USD G-255 supply is now over $27 billion and closing in on $700 bil for the year.
Last week was the 8th week in 11 where both ETF and Mutual fund corporate bond flows were positive.
Systematic Trading Model Indicators and Strategy
Model Output
772 Attractive short indicators . 2 more than Friday and -171 fewer than a week ago.
63 attractive long indicators: -8 from 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:
19 long trades reached their avoid trading levels in the past 30 days and were replaced by 8 new issue indicators
Systematic Credit Trading Strategy August 11, 2025
Closed Positions: Last week long/ short basket trading exited the Mercedez Benz (A3/A-) MBBGR FRN 4/1/27.
Enter New Longs: Last week the trading model indicators added as long trades: Barclays (Baa1/BBB+) BACR Float 11/11/29 and BACR 4.47 11/11/29, Daimler Truck (A3/A-) DTRGR 10/12/32, BMW (A2/A) BMW 4 1/2 08/11/30 08/11/25.
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.
Weekend 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
No new trading model indicators on Friday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 8, 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 -4.13 bp.
Remaining Shorts: 5 tightened by -14.19 bp.
Average Spread Movement: ±7.51 bp in the recommended direction.
Success Rate: 92% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (21 trading days) 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.