Systematic Credit and Equity G-255 Trading Indicators for August 7, 2025
Good morning! The standout earnings surprise of the year—possibly the century—comes from McDonald's (MCD Baa1/BBB+, attractive bond short / buy the equity), driven not only by comparable store sales and earnings figures. McDonald's stunned the market by filing its 10-Q (including geographic metrics, cash flow, and balance sheet data) on the same day as its equity earnings release. Despite the only notable management change in the past two years being at the Chief Information Officer level, McDonald's has transformed its reputation over the last six months. Once viewed as a notoriously opaque corporate reporter, it now delivers all necessary information to paint a complete financial picture of the company's progress (or lack thereof) within five minutes of reporting results.
Notably, one word was absent from McDonald's 10-Q: "adjusted." This omission, absent from this quarter's disclosure, undeniably contributed to today's 2.5% equity surge. If you think the absence of "adjusted" didn't play a role, you're mistaken. I'm frequently asked about the "cash bubble" and when risk assets will face a significant hit. More on that tomorrow, but rest assured, the next stock market correction will hinge on "adjustments."
On the topic of adjusted earnings, the US Big 6 banks have filed their 10-Qs, making all their operating and balance sheet data (for better or worse) fully available.
US Big 6 Bank G-255 issuers 2Q 2025 Sector Operating Metrics
To keep it concise: YoY revenue growth for the group is flat. YoY share repurchasing and dividends rose +17%, yet after "adjusted earnings," shareholder returns exceeded operating income by "just" 500bp.
US Big 6 Bank G-255 issuers 2Q 2025 Sector Balance Sheet
Have I seen this movie before? My time only extends to the 1972 – 74, 1987, 1990, 2007, and 2012. Easier just to watch "Unbreakable" with Bruce Willis.
Model Suggested Trade: Short Big 6 bank debt / Long Big 6 equity.
Earnings Summary (Week of August 8, 2025):
Among the 255 largest global corporate debt issuers, 79 are reducing leverage, while 94 are increasing net debt. Twenty-six issuers experienced 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. Seventy-four issuers are yet to report for the June–August fiscal period.
Sectors Reducing Debt/Adding Cash: (1) TMT (A and BBB), (2) Non-Nordic European Banks, (3) Global Autos, (4) BBB Energy.
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.
Please see the attached earnings digest for systematic trading model for equity and debt issuer indicators since July 25. Contact us for individual issuer trading curves with all liquid bonds.
Systematic Trading Model:
The model generates daily indicators for over 6,000 bonds. Currently, 795 bonds ($1.14 trillion) are within 20% of their 52-week tight or wide spread levels, 28% 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 141 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.52 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 August 4, 2025, 20 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Strong inflows into US Bond ETFs and Mutual Funds for IG last week; HY inflows were mixed.
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
Total US weekly rail traffic was 514,279 carloads and intermodal units, +1.1% compared to 2024. Carloads for the week ending July 26 were 231,029, +0.9% from 2024, while weekly intermodal volume was 283,250 containers and trailers, +1.3% compared to 2024.
Those are the weakest rail car numbers in 3 years,
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -8% Below average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -1% below average
-G-255 Issuers: 14 of the top 25 traded bonds accounted for 52% of top 25 issuer volume and 47% of total TRACE volume.
Market Movement
U.S. CDX Index: -.5bp @ 52bp
U.S. IG Cash Spreads: Ranged from (+1bp) wider to (-3bp) tighter. BBB and Single communications outperformed.
CDX HY Index: unchanged @ 107 (per Bloomberg).
HY Cash Bonds: BB Tech and outperformed on Wednesday. BB communications underperformed.
High-Yield Activity
- Dealers sold $400mm of HY bonds Wednesday.
Most Bought HY Bonds
- Commscope (COMM B3/B-)
Most Sold HY Bonds
- Howard Midstream Energy (HOWMID B1/BB-)
Investment-Grade Activity
- Dealers sold $500 mm of IG bonds Wednesday.
Most Bought Sector: Single A Communications
- Comcast (CMCSA, A2/A- attractive short)
- NTT (NTT, A3/A- attractive short)
Most Sold Sector: Utilities
- Dominion Energy New Issue (D, Baa3/BBB-)
- American Water Capital (AWK A2/A)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT, BBB Energy and Euro Yankee Banks Overall model indicators 186 bonds ($255 billion) are considered undervalued by the stochastic credit trading model with 73 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1453 bonds ($1.21 trillion) are considered overvalued by the stochastic credit trading model with 722
attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $717 billion in overvalued market capital across 287 bonds, with 104 short indicators.
Single A and BBB industrials $157 billion, in overvalued market capital across 135 bonds, with 84 short indicators.
Single A and BB energy $149 billion in overvalued market capital across 90 bonds, with 50 short indicators.
Single A Consumer $112 billion in overvalued market capital across 94 bonds, with 43 short indicators.
Issuer News
Hyundai Motor Co (HYNMTR A3/A- attractive long) and General Motors Co (GM) Baa2/BBB short) plan to jointly develop five vehicles that will hit the market in 2028. The vehicles include an electric van for North America and four vehicles for the central and South American market, such as a compact SUV, sedan and two pick-ups.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 55% 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 slightly tighter YoY and wider YTD.
UST 10Y rates are +29.3 bp higher YoY and -33.3bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices were directionally correlated for the 119th trading day out of a possible 140 Wednesday. 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 August
3 G-255 issuers sold 5 new bonds Wednesday with BMW (A2/A) following Daimler Truck (DTRGR A3/A- attractive long), Standard Chartered (STANLN A3/BBB+ attractive long) and Barclays (BACR Baa1/BBB+ attractive long) as just the 9th de-levering issuers to sell debt since reporting 2Q results.
The BMW 4 ½ 8/11/30 was by far the most attractive new deal sold Wednesday based on both price (-8bp) of expected tightening and size ($1 bill). While the Oneok (OKE) deals were deemed unattractive based on trading model indicators.
Bond ETF Inflows Increase 20% Led by Broad Market; Corporates Up
Investments in US-listed fixed income exchange-traded funds expanded 20% in the past week for the 17th straight week of inflows. Broad bond-market ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week.
Net inflows to ETFs totaled $9.22b in the week ended Aug. 5, 2025, including the effect of leveraged funds, compared with $7.66b the prior week
Broad bond-market ETFs expanded by $896.5m to $3.77b
Corporate bond ETFs swung by $3.44b to $3.43b
Investment-grade ETFs dropped by $1.5b to $3.9b, and high-yield ETFs expanded by $1.54b to $1.61b
Net inflows totaled $210.7b year-to-date
IShares 0-3 Month Treasury Bond ETF had the biggest inflow, of $1.46b
IShares 20+ Year Treasury Bond ETF had the biggest outflow, of $1.81b
Systematic Trading Model Indicators and Strategy
Model Output
722 Attractive short indicators . 38 more than Wednesday and -142 fewer than a week ago.
73 attractive long indicators: -4 from 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:
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 6, 2025
Closed Positions: The long/ short basket trading exited the Mercedez Benz (A3/A-) MBBGR FRN 4/1/27 Monday.
Enter New Longs: Trading model indicators added as long trades Monday Barclays (Baa1/BBB+) BACR Float 11/11/29 and BACR 4.47 11/11/29 and Daimler Truck (A3/A-) DTRGR 10/12/32 Tuesday. On Wednesday added the new BMW (A2/A) BMW 4 1/2 08/11/30 08/11/25.
Enter New Short trades: On Wednesday 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.
Basket Trade long/short Wednesday 61.5%
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
Trading model indicators added as long trades: On Wednesday added BMW (A2/A) BMW 4 1/2 08/11/30 as an attractive new issue indicator.
Trading model indicators added as short trades: On Wednesday added Truist Bank subordinated (A3/A-) TFC 2 1/4 03/11/30.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 6, 2025)
Total Trades: 141 (1% of total trades).
Performance Summary:
Long Indicators: 102/110 reached avoid-trading levels, tightening by -9.41 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 8 tightened by -2.55 bp.
Remaining Shorts: 4 tightened by -16.87 bp.
Average Spread Movement: ±7.52 bp in the indicated 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.