Systematic Credit and Equity G-255 Trading Indicators for August 1, 2025
Good morning: We await the US non – farm payrolls data and the markets begin to react to the August 1 tariff deadline restrictions implemented by the US Whitehouse.
We have made our quantitative observations of the impact on the tariffs into corporate earnings and securities valuation.
So to clarify: While the articulation and implementation of the tariffs has been less than straightforward there have been clear winners and losers in terms of sector trading strategies. We mention those below.
However (3) major observations as to the the world's response to the change in US trade dynamics that have a material impact on risk trading (equities, USTs and corporate debt).
(1) much of the tariff announcement/implementation has led to lower employment and prices, this comes courtesy of the increased use of AI to eliminate support and communication (voice) roles. The job elimination at most major firms including those that provide the AI.
The tariffs themselves particularly in the consumer staples/auto/healthcare/energy sectors have led to flat to negative pricing as the larger branded companies absorb the tariff costs and are unable to pass on any pricing whatsoever.
(2) The use of AI and implementation of cost saving measures at the world's largest corporates is moving so rapidly that we are seeing an immediate impact on both corporate earnings and valuations. Technology, healthcare, Autos, Branded Consumer, Communications, Media and Retail issuers are all experiencing pricing fallout from trade tariffs and the implementation of AI. This has been reflected in reported earnings and valuations both positively and negatively.
This has also contributed mightily to equity volatility post reported 2Q results.
(3) Finally, negative sentiment toward the US is evident in the volatility of US dollar trading levels. Combined with pricing pressures and AI implementation, this is driving a significant increase in cryptocurrency use for transactional purposes.
In my lifetime, discussions about replacing the US dollar as the world's reserve currency have been so frequent that the idea has become a 60-year running joke. I rely solely on quantitative data, avoiding speculation. In just six months, the Trump administration has achieved what no other US administration, including Richard Nixon's, has: prompting major sovereigns and corporations to explore alternative currencies for transactions.
These three issues—US dollar volatility, pricing pressures, and AI implementation—are now significantly influencing corporate earnings and risk market valuations, dominating trading volumes and levels.
Tariffs and Disinflation:
Did I really say tariffs are not proving inflationary? Yes. However, this comes with significant long-term complications.
This Week's Earnings Reports:
In three sentences: While the largest corporate debt issuers are increasing leverage to reward shareholders, this trend is more pronounced in the US. The inability to pass on tariff-related pricing in the auto, consumer, and healthcare sectors is significantly impacting cash flow. Utilities and Yankee banks
By far the best earnings report this week came from Credit Agricole. We will have more on that next week. However, we have noted that under- owning the French Banks would hurt US manged Funds and it has.
Earnings Recap of the past 3 days (56 issuers) and model output for July 31.
3 Day Total Indicators for 56 Reports:
• 9 indicators: sell the equity and sell the bonds.
• 19 indicators: sell the bonds and go long the stock.
• 1 indicator: sell the stock and go long the bonds.
• 27 indicators: long bonds and the stock.
Of the 56 equity indicators, 20 were at executable prices.
• 4 long bond indicators.
• 31 undervalued long indicators.
• 136 overvalued short indicators.
• 187 attractive short indicators.
These outputs will be updated daily, with a summary provided.
Earnings Summary for the Week of August 1:
Based on results reported this morning, 60 of the world's 255 largest corporate debt issuers are reducing leverage, while 77 are adding net debt. Nineteen issuers have seen balance sheet changes. Fifteen of the world's largest corporate balance sheets, which were trimming debt last quarter, are now adding net debt. Conversely, eight 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, 995 bonds are within 20% of their 52-week tight or wide spread levels, 67% 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 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
Initial US Jobless claims for the week ending July 26 fell -30k YoY. That's an extraordinary number and points to lower unemployment rates. The the 4 weekly average fell 15k YoY to 221k
The core personal consumption expenditures price index rose 0.3% from May and 2.8% on an annual basis, according to Bureau of Economic Analysis data.
Inflation-adjusted consumer spending edged up last month after declining in May, with the gain in June spending reflecting a rebound in outlays for non-durable goods.
Challenger, Gray & Christmas reported 62,075 job cut announcements in July; 806,383 year-to-date.
July year-over-year percentage increase largest in four months
Job cuts announced in the East 13,055; Midwest 10,152; West 31,445; South 7,423
Challenger: Total job cuts this year are the highest YTD since 2020 when 1,847,696 were announced, up 75% from the same period last year.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +70% above average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 95% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +70% average
-G-255 Issuers: 17 of the top 25 traded bonds accounted for 59% of top 25 issuer volume and 50% of total TRACE volume.
Market Movement
U.S. CDX Index: +.3bp @ 51 bp
U.S. IG Cash Spreads: Ranged from (+2bp) wider to (-2bp) tighter; But overall were unchanged.
CDX HY Index: -.1 @ 107.2 (per Bloomberg)
HY Cash Bonds: HY Healthcare outperformed. HY TMT underperformed Thursday.
High-Yield Activity
- Dealers bought $500mm of HY bonds Thursday.
Most Bought HY Bonds
- Discovery Communications (Ba2/BB attractive short)
Most Sold HY Bonds
- Charter Communications (CHTR Ba1/BBB- attractive long)
Investment-Grade Activity
- Dealers bought $1.7 bil of IG bonds Thursday.
Most Sold Sector: Big 6 banks
- JP Morgan (JPM, A1/A attractive short)
- Morgan Stanley (MS, A1/A- attractive short)
Most Bought Sector: BBB TMT
- Verizon (VZ, Baa1/BBB+ attractive attractive long)
- Oracle (ORCL Baa2/BBB attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 132 bonds ($185.2 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
1520 bonds ($1.61 trillion) are considered overvalued by the stochastic credit trading model with 944 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $753.4 billion in overvalued market capital across 301 bonds, with 189 short indicators.
Single A and BBB industrials $192.6 billion, in overvalued market capital across 153 bonds, with 104 short indicators.
Single A, BBB and BB energy $245 billion in overvalued market capital across 162 bonds, with 108 short indicators.
Single A Consumer $110.5 billion in overvalued market capital across 92 bonds, with 54 short indicators
Issuer News
56 earnings results reports in the past 2 days.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 68% 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 rates are +42.0 bp higher YoY and -17.5bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices did not correlated directionally in Thursday. 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
UBS (UBS) sold $2 bil of 5YNC and 10YNC perpetual rate subordinated bonds that were priced within 20 bp of similar call/maturity Perps issued in February of this year.
Including Thursday's UBS Perps, 10 of the 24 new bonds sold in the past 12 trading days have reached their reached its avoid trading level as determined by our trading model.
US fund flows for the week ended July 30, compared to a week earlier: according to LSEG Lipper.
Short and intermediate investment-grade bonds: $1.3b inflow vs. $1.9b inflow
High-yield notes: $167m outflow vs. $909.5m inflow
Treasuries: $2.43b inflow vs. $618m inflow
US leveraged loans: $255m inflow vs. $715.4m inflow
Mortgage-related: $555.1m inflow vs. $630.6m inflow
As noted yesterday, 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.
Systematic Trading Model Indicators and Strategy
Model Output
941 Attractive short indicators . 52 more than Thursday.
54 attractive long indicators: 20 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:
18 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 31, 2025
Closed Positions: The long/ short basket trading exited the So Cal Ed First Mort (A2/A-) EIX 5.45 03/01/35 Thursday
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 Thursday 61%
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
After 110 trading days, the So Cal Ed First Mort (A2/A-) EIX 5.45 03/01/35 reached its reached its avoid trading level on Thursday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 31, 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 -8.04 bp.
Remaining Shorts: 4 tightened by -18.08 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.