Systematic Credit and Equity G-255 Trading Indicators for July 8, 2025
Good Morning,
Correction: The NWIDE 10Y should read "attractive to 109/10Y."
Monday's credit trading was less pronounced than equity results, with both indices closing lower. Historical data for the week following July 4 (10 days prior to US Big 5 banks' earnings) shows no significant improvement in credit valuations over this 7-day period.
With US credit spreads nearly unchanged for 2025 and approximately 800 "attractive short" systematic credit trading indicators—representing over $1.25 trillion in market value—is the US credit market "overvalued" per our trading model? Yes. Should participants consider selling or shorting credit based on the model's output? No. Until money stops flowing into credit, systematic widening of credit spreads or falling high-yield (HY) prices is unlikely.
How Does the Model Seek Value in an Overvalued Market?
New issue indicators are excluded from the Systematic Credit Trading Model indicators, which only include bonds publicly traded for at least 22 trading days. As a risk management tool and profitability indicator, the model often highlights new issue markets for profitable trades when the market is deemed "overvalued."
Yesterday, we saw four new G–255 issues and published Systematic Trading Model indicators including "avoid trading" points, to maximize returns while minimizing volatility risk.
Key New Issue Trades from Monday
The two most notable trades were:
Broadcom (AVGO, Baa2/BBB, Attractive Long): A $5 billion, 3-tranche deal (details below).
Carnival (CCL, BB+/BB, Attractive Long): A $3 billion, 7-year non-callable issue.
Despite aggressive pricing, two factors underscore their attractiveness:
Size and Liquidity: Both deals are among the largest since the credit spread widening from February 22 to April 10. A $3 billion HY transaction is significant, reflecting strong fund flows and demand for larger-cap issues.
Credit Curve Dynamics: Quantitatively speaking, corporate bonds trade relative to their issuer's credit curve, not other issuers' bonds. Broadcom, Carnival, Nationwide, and CIBC deals priced attractively compared to their existing curves, particularly due to coupon-driven duration. High demand indicates these new bonds are more attractive than the issuers' older bonds.
Earning Season starts tomorrow
As Delta (DAL) reports earnings tomorrow, we've included 1Q operating and balance sheet model outputs for the US airline industry on pages 5–7.
LQD Performance in a Credit Spread Peak Scenario
We've been asked how the LQD ETF would perform if credit spreads widen significantly. Given its long-only structure and sector constraints, LQD is constructed to outperform the broader credit market by several basis points during severe spread widening. This is due to:
Balanced exposure to Single A vs. BBB credits.
Overweight in stable non-financial sectors.
Emphasis on liquid bonds, which enhances performance in volatile markets.
For further details, refer to our July 7 and June 30 Systematic Credit Model Indicator Overviews.
Best Systematic Trades with/against LQD
We've also been asked about the best systematic trades involving LQD. This will be addressed next week. However, trading individual bonds against LQD's NAV is generally not profitable and is not indicated by our model. Poor bond selection for shorting against LQD could lead to significant losses due to its specific construction.
Systematic Trading Model Insights and Trading Strategy (July 8, 2025)
The Systematic Trading Model uses data for over 6,000 bonds, with 859 currently within 20% of their 52-week tight or wide spread levels (55% above historical averages).
Current Trading Strategy
Allocation: 62% long, 18% short, 20% front-end allocation (67% in floating-rate notes maturing within 3 years, targeting undervalued, de-levering bonds).
Performance: Of 128 long/short trades (marked to market via TRACE) published in 2025, 89.7% achieved ±5 bp targets, averaging ±7.42 bp per trade.
Recent Activity: The model paused adding short positions on July 2, 2025, due to strong credit inflows for the weeks ending June 25 and July 2, 2025. Between June 30 and July 3, 2025, 9 long trade indicators reached "avoid" levels, shifting the long/short basket trade to a "more short" stance. We published 2 new attractive long new issue indicators in this morning's report.
Sector Trading Indicators for Tuesday
Long: Yankee Banks, Single A TMT (strong balance sheets, low credit risk).
Short: U.S. Big 6 Money Center Banks, Single A Healthcare, Single A and BBB Industrials (re-levering, tight spreads), BBB TMT with larger issuer tech firms re-levering.
The model avoids adding risk to any G-255 issuers scheduled to report results within 30 days, in compliance with global regulatory requirements to report "material events" within 30 days of a scheduled earnings release.
Model Characteristics
Systematic credit trading relies exclusively on publicly available information, with no subjective or human input incorporated into the model's intellectual property.
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: 7.5% below average
-G-255 Issuers: 94 of the top 100 traded issuer bonds, accounting for 95% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -11.3% above average
-G-255 Issuers: 14 of the top 25 traded bonds, accounting for 56% of top 25 issuer volume and 50% of total TRACE volume.
Market Movement
U.S. CDX Index: +1.5bp wider Monday @ 51 bp
U.S. IG Cash Spreads: Were unchanged to +3 bp wider; US Financials outperformed, Energy underperformed
CDX HY Index: fell -.3 pt @ 107.60 (per Bloomberg)
HY Cash Bonds: BB TMT and BB financial bonds were top performers. Autos and Energy underperformed
High-Yield Activity
- Dealers bought $1 billion of HY bonds Monday.
Most Bought HY Bonds by End Users
- Nissan (NSANY Ba2/BB attractive long)
Most Sold HY Bonds by End Users
- Unity /CSL (Caa2/CCC)
Investment-Grade Activity
- Dealers net bought $600 million of IG bonds Monday.
Most Bought End-User Bonds
- Hewlett Packard Enterprises (HPE, Baa2/BBB attractive long)
Most Sold Issuer Bonds
- EOG Resources (EOG, A2/A-)
Inflation, Economic Data, and Interest Rates
None on Monday
Attractive Trading Sectors
Long Opportunities
None. 165 bonds ($236.9 billion) are considered undervalued by the stochastic credit trading model with 61 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1397 bonds ($1.379 trillion) are considered overvalued by the stochastic credit trading model with 798 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $721.9 billion in overvalued market capital across 286 bonds, with 149 short indicators.
BBB TMT $222.5 billion in overvalued market capital across 132 bonds, with 75 short indicators.
Single A, BBB and Industrials $222 billion in overvalued market capital across 132 bonds, with 75 short indicators.
Single A Healthcare $180.6 billion in overvalued market capital across 124 bonds, with 74 short indicators.
Issuer News
LVMH (MCFP, Aa3/AA-, Attractive Short): LVMH appointed Michael Burke to lead its Americas operations, overseeing North and South America and reporting to Group Managing Director Stephane Bianchi. Burke, 68, will also serve as non-executive chairman of Tiffany & Co., acquired by LVMH in 2021.
Novartis AG (NOVNVX, Aa3/AA-, Attractive Short): Novartis received regulatory approval for the first malaria treatment designed for infants, marking a significant advancement in combating the mosquito-borne disease.
Volkswagen (VW, Baa1/BBB+, Attractive Short): Porsche AG, a Volkswagen subsidiary, issued a sales warning due to a US market slowdown and weakness in China. Global deliveries dropped 6% in the first half of 2025, with a 28% sales decline in China driven by intense competition.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 60% of the widening observed from November 12, 2024, to April 10, 2025. Post last week's rally US credit spreads are now materially tighter over the past 10 trading days.
Valuation: U.S. credit remains overvalued based on output from our credit trading model.
Global Equity Correlation to IG Credit Spreads
Credit spreads and prices again remained directionally tied to each other. While US credit spreads were slightly wider on Monday, the S&P 500 dropped -.79% and the US Dow Jones fell -.94%. This movement somewhat mitigates last week's movement where both credit and US equities were better, but equities outperformed.
New Supply, Bond Maturities, and Credit Fund Inflows for July
The month of July began with four G-255 deals:
Broadcom Inc. (AVGO, Baa1/BBB)
Canadian Imperial Bank of Commerce (CM, Baa3/BBB-)
Nationwide Building Society PLC (NWIDE, A3/BBB+)
Carnival Corp. (CCL, Ba3/BB+)
These deals totalled $10.8 billion, averaging over $1 billion per trade, marking only the second time in three months that such a high average has been observed.
As previously noted, tight credit spreads have spurred both increased supply and demand for corporate credit. The Broadcom and Carnival transactions drew significant interest, partly due to their substantial offering sizes. All four deals performed strongly in the grey market and upon free trading.
Additionally, Toyota (TOYOTA) and Volkswagen (VW) issued bonds in the UK and Europe on Monday, while BBVA (BBVASM) announced a 5-year SNP deal in Europe this morning.
Systematic Trading Model Indicators and Strategy
Model Output
798 attractive short indicators: 30 more than Monday, marking the highest number of short trades since November 20, 2024.
61 attractive long indicators: 1 lower than Monday.
Weekly Trading Strategy (ending July 10) Model output changes slightly until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Add shorts of re-levering issuers with the deepest discount from their model avoid point.
Systematic Portfolio Trading Model Indicators: Replace Systematic attractive longs that have reached their avoid trading level. Once the systematic 80% long hurdle is met, then 1 short for each 1 long position – Note number of long positions has declined by (-9) since last Thursday as we publish 2 new issue indicators for Broadcom (AVGO).
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.
Most Recent Systematic long/short trades:
Broadcom (Baa2/BBB) AVGO 4.9 07/15/32 is added this AM as a new issue trade by the Systematic Credit Trading Model
Broadcom (Baa3/BBB) AVGO 5.2 07/15/35 is added this AM as a new issue trade by the Systematic Credit Trading model
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 7, 2025)
Total Trades: 128 (1% of total indicators).
Performance Summary:
Long Indicators: 88/97 reached avoid-trading levels, tightening by -9.59 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 9 tightened by -2.78 bp.
Remaining Shorts: 4 tightened by -15 bp.
Average Spread Movement: ±7.42 bp in the indicated direction.
Success Rate: 89.8% of indicators reached avoid-trading levels (0.3% below normal).
Average trade holding period: (22 trading days) + 17% above normal.
1Q G-255 Earnings Sector Report – US Airlines
All three major US airlines—Delta Air Lines, United Airlines, and American Airlines—carry over $15 billion in marketable balance sheet debt. Last month, Delta Air Lines (DAL, Baa2/BBB-, Attractive Long) issued the third series of US airline general unsecured bonds in the past three years. These bonds reached the Systematic Credit Model's "avoid trading" threshold in under 15 trading days.
Industry Financial Trends
The airline industry has been deleveraging for 21 consecutive quarters since the COVID-19 pandemic.
Industry net debt is near a 10-year low.
Industry liquidity of $26 billion remains within $5 billion of an all-time high.
Operational Performance
Despite warnings from all three airlines that Q2 operating results may be affected by ongoing US trade negotiations:
Year-over-year operating profit in Q1 2025 increased by over 100%.
Net operating margins are at industry highs.
The industry is not using corporate debt markets to fund shareholder rewards, such as increased dividends or share repurchases.
Upcoming Earnings Reports
Delta Air Lines (DAL, Baa2/BBB-, Attractive Long): July 10, 2025
United Airlines (UAL, Ba1/BB+, Attractive Long): July 16, 2025
American Airlines (AAL, Ba2/BB, Attractive Long): July 25, 2025
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.