Systematic Credit and Equity G-255 Trading Indicators for July 24, 2025
Good morning: First – we saw the second IG ETF outflow in 4 weeks and hit 860 attractive short trading indicators overnight, which pushed our Systematic trading model indicators to move the allocation on long trades v. short trades. The new allocation is shown below. Is now the correct time get short USD corporate Credit? A: No.
While yesterday's trading volumes were slightly below average, trading was much pointed and enthusiastic. As we have pointed out, for the first time in almost 2 years equity and credit risk is just beginning to see reported results and balance sheet disposition impact trading and valuations. Why? A: there is a limit as to how much even the world's largest corporates can borrow without seeing their borrowing costs rise. Several issuers are cutting back on returns to shareholders to keep their leverage ratios within a range that neither the banks, nor the rating agencies will have much to say.
Earnings Summary for the Week of July 24
I am running short on time so here goes:
Including this AM's reported results, thus far 24 of the world's 255 largest issuers of corporate debt are reducing leverage and 39 are adding net debt. That is the largest disparity on an interim basis for the world's largest borrowers since 2012.
12 issuers have seen balance sheet change. 8 of the worlds largest corporate balance sheets are now adding net debt while in the prior quarter they were trimming debt. 4 of the world's 255 largest issuers that were re-levering post 1Q results are now de-levering at the end of 2Q.
Sectors where issuers are reducing debt or adding cash?
Thus far BBB TMT and Non – Nordic European Banks.
Sectors adding the most net debt?
A rated Energy, Big 6 banks and Aerospace and Defense issuers (Single A and BBB rated). Issuers not adding net debt (thus far)? Auto finance.
Sectors most negatively impacted by US Trade Tariffs?
(1) US Auto (2) US Retail (3) US Consumer. (4) US transports. (5) All of healthcare. The anti -Trump sentiment around the world is clearly showing up in earnings reports.
G-255 Issuers reporting results Wednesday
Equinor (EQNR, Aa3/AA- attractive long to attractive short)
UniCredit (UCGIM Baa1/BBB+ attractive long)
ATT (T Baa2/BBB attractive long)
Fiserv Inc (FI, Baa2/BBB attractive short)
Next Era Energy (NEE Baa1/BBB+ attractive short)
Thermo Fisher (TMO),A3/A- attractive long to attractive short)
Rogers Com (RCICN, Baa3/BBB- attractive short to attractive long )
Crown Castle (CCI, A2/A- attractive short)
Alphabet (GOOGL Aa2/AA+ attractive long)
IBM (IBM Baa1/BBB attractive short)
T - Mobil (TMUS, Baa2/BBB attractive short to attractive long)
CSX (CSX A3/BBB+ attractive short )
G-255 Issuers reporting results Thursday
Hyundai Motors (HYNMTR A3/A- attractive long) Reported
TotalEnergies (TTEFP Aa2/A- attractive short) Reported
BT Group (BT/A Baa2/BBB attractive short) Reported
Lloyds Banking Group (LLOYDS A3/BBB+ attractive long) Reported
BNP Paribas SA (BNP Baa1/A- attractive long) Reported
Deutsche Bank (DB Baa1/BBB attractive long) Reported
Roche (ROSW Aa2/AA+ attractive long) Reported
Nestle (NESVNX Aa3/AA- attractive long to attractive short) Reported
LVMH (MC FP Aa3/AA- attractive long) Aft-Mkt
Union Pacific (UNP A3/A- attractive short ) Bef-Mkt
Dow Inc (DOW Baa2/BBB attractive short) Bef-Mkt
GE Healthcare (GEHC A3/A attractive long) Bef-Mkt
Honeywell (HON) A2/A-, attractive short) Bef-Mkt
American Airlines (AAL BA2/BB- attractive long) Bef-Mkt
Intel (INTC Baa2/BBB attractive short ) Bef-Mkt
Keurig Dr. Pepper (KDP Baa1/BBB attractive short) Aft-Mkt
Systematic Trading Model Indicators and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 928 bonds are within 20% of their 52-week tight or wide spread levels, 65% above historical averages. Yesterday's earnings reports were the primary driver or more short indicators. For the week ending July 22 we saw a second ETF high grade and fund flow outflow in 4 weeks while high yield flows were ostensibly flat. Our trading model allocation indicator changes for the second week in 4.
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 134 long/short trades in 2025 (marked to market via TRACE), 99% 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, 15 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. 4 new attractive long new-issue indicators were published this week. Last week's ETF IG outflow and minimal HY inflow moved the Systematic Trade indicator allocation to 70% long.
Sector Trading Indicators
Long Opportunities:
Yankee Banks (especially floating-rate notes).
Single A and BBB TMT
Short Opportunities:
U.S. Big 6 Money Center Banks.
Single A, BBB and BB Energy issuers re-levering
Single A and BBB Industrials (re-levering, tight spreads).
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
Sales at stores open at least a year, or same-store sales, rose 5.1% in the July 19 week compared to a year earlier, Johnson Redbook says.
Month-to-date sales through July 19 rose 5.2%
July sales expected to be up 5.7% over the same month of the previous year
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -7% below average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 78% of total TRACE volume.
High-Yield (HY) Trading
-Volume: average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 60% of top 25 issuer volume and 55% of total TRACE volume.
Market Movement
U.S. CDX Index: tightened by (-1bp) @ 50 bp
U.S. IG Cash Spreads: Ranged from (-1 to -3bp) tighter; BBB TMT outperformed. No trading sector was wider on Wednesday.
CDX HY Index: closed +.2pt higher @ 107.7 (per Bloomberg)
HY Cash Bonds: HY Healthcare outperformed. No trading sector was lower on the day.
High-Yield Activity
- US dealers bought $ 600 million of HY bonds Wednesday.
Most Bought HY Bonds
- Walgreen /Boots (WBA B1-/BB-)
Most Sold HY Bonds
- Carnival (CCL Ba3/BB+ attractive long)
Investment-Grade Activity
- End users bought $800mm of IG bonds Wednesday.
Most Sold Sector: Big 6 Banks
- Wells Fargo (WFC, A1/BBB- attractive short)
- Citigroup (C, A3/BBB+ attractive long)
Most Bought Sector: BBB TMT
- T - Mobil (TMUS, Baa2/BBB attractive long)
- ATT (T 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 180 bonds ($263.4 billion) are considered undervalued by the stochastic credit trading model with 68 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1474 bonds ($1.53 trillion) are considered overvalued by the stochastic credit trading model with 860 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $743 billion in overvalued market capital across 297 bonds, with 168 short indicators.
Single A and BBB industrials $182.2 billion, in overvalued market capital across 146 bonds, with 81 short indicators.
Single A, BBB and BB energy $246.1.billion in overvalued market capital across 173 bonds, with 110 short indicators.
Issuer News
BP (BPLN A2/A- attractive short)One Rock Capital Partners is one of the few remaining bidders for BP Plc's Castrol lubricants business, according to Bloomberg. Castrol was said to have an $8 billion valuation.
CSX (CSX A3/BBB+ attractive short) Corp. Chief Executive Officer Joe Hinrichs said he's open to merger talks with other companies amid reports that Union Pacific (UNP A3/A- attractive short) . and Norfolk Southern (NSC Baa1/BBB+ attractive short). are discussing a combination.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 51% 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 10 year credit spreads: Are wider YTD and YoY
UST 10Y rates are +10 bp higher YoY and -18bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 62nd trading day in 71. 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
On Wednesday, Lockheed Martin (LMT, A2/A-) became the 12th G-255 issuer to sell bonds post reporting results. They are the 10th issuer that has reported that is using balance sheet to return capital to shareholders. The new issue comes within 12% of Lockheed Martin (LMT) 52 weeks tight spreads, but was prices relative to existing Lockheed bonds.
Net inflows to ETFs totaled $3.36b in the week ended July 22, 2025 vs. $6.46b the week ended July 15.
Broad bond-market ETFs expanded by $538.3m to $2.23b
Corporate bond ETFs swung by $3.25b to outflows of $2.2b
High-yield ETFs expanded by $42.4m to $1.13b,
Investment-grade ETFs swung by $3.93b to outflows of $159m
Vanguard Long-Term Corporate Bond ETF had the biggest outflow, of $2.95b
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 860. 88 more than Wednesday.
68 attractive long recommendations: 6 fewer than Wednesday.
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:
14 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 24, 2025
Closed Positions: The long/ short basket trading existed both the Apple (Aaa/AA+) AAPL 4.2 05/12/30 and Sumitomo Financial (A1/A) SUMIBK Float 07/08/31 on Wednesday
Enter New Longs: Today the model added GE Aerpspace (A3/A-) GE 4.9 01/29/36 on Tuesday
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 – 69%
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
Apple (Aaa/AA+) AAPL 4.2 05/12/30 reached its reached its avoid trading level on Wednesday
Sumitomo Financial (A1/A) SUMIBK Float 07/08/31 reached its reached its avoid trading level on Wednesday
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 23, 2025)
Total Trades: 134 (1% of total trades).
Performance Summary:
Long Indicators: 93/104 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 -5.68 bp.
Remaining Shorts: 4 tightened by -15.25 bp.
Average Spread Movement: ±7.64 bp in the recommended direction.
Success Rate: 89% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (22 trading days) + 17% 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.