Systematic Credit and Equity G-255 Trading Indicators for July 29, 2025
Good morning: Several week-over-week changes in the LQD are relevant to current credit valuation and trading strategy. To clarify, I have no affiliations with BlackRock. Our systematic credit trading model serves two purposes: (1) It has been a detailed, high-level risk management tool for over 35 years. (2) It generates over 6,000 daily trade indicators across four asset classes: (1) Equities, (2) Single A-rated, (3) BBB-rated, and (4) Non-investment-grade-rated cash corporate bonds.
The model operates without human judgment, relying solely on publicly available data. It employs five distinct data hierarchies and five basic finite statistical algorithms to create a stochastic layout covering approximately 90% of the liquid credit markets. It is designed to manage up to $750 billion in bonds.
Regarding BlackRock, the LQD, when analyzed through our risk module (which evaluates all 3,000 bonds by sector, rating, coupon, liquidity, balance sheet leverage, and exposure to spread tightening/widening), demonstrates BlackRock's bond management capability within its long-only mandate. To be clear, the management of the LQD portfolio is highly impressive given the fund's structure and current credit market metrics.
Yesterday, we discussed the declining cash flow and lack of unit volume growth in the Single A consumer sector. Week over week, LQD increased its stake in Single A consumer bonds. However, given its mandate and current market valuations, the shift toward lower-coupon Single A consumer bonds aligns with a risk management strategy, indicating that LQD's management views credit valuations as near a peak and anticipates lower future interest rates.
The Systematic Trading Model covers approximately 85% of LQD's holdings, consistent with the prior four weekly indicators. Bonds outside our trading/research universe are primarily from issuers with less than $15 billion in tradable debt market capital.
Exposure to re-levering BBB credit has been reduced. While 61% of LQD's issuer exposures are adding net debt (higher than the overall market), only 41% of the actual bond holdings in those issuers are flagged as overvalued or attractive for short indicators.
PepsiCo (PEP A1/A attractive short), PNC (A3/A- attractive long), and GE Aerospace (A3/A-) are the only notable new supply additions week over week.
Several sector adjustments were made to prepare for lower future interest rates and credit spread widening. While our systematic model's attractive short trading indicators for LQD-held bonds have nearly tripled month-over-month, now representing 24% of the LQD, exposure to credit events or spread widening has decreased by over 10% in a week. Key observations include:
(1) Increased liquidity
(2) Higher credit quality
(3) Exits from banks, except for three U.S. regional banks: Truist (TFC, Baa1/A-, avoid long), U.S. Bank (A3/A-, attractive long), and PNC. Reduced exposure to UK, Japanese, and European banks, with no exposure to French banks.
(4) Underweight Yankee bonds as a strategy.
(5) Slightly reduced duration.
(6) Exits from overweight positions in TMT (Single A and BBB), BBB industrials, and BBB healthcare.
We provide trade indicators only to clients, but it's evident that LQD has shifted to "higher ground" in preparation for a potential "storm." This creates long/short opportunities where LQD is corporate long (holding less volatile exposure, better positioned for lower interest rates than other funds), while the short would target BBB or lower-rated re-levering credit.
The Big 6 banks have been significantly re-levering for the past 12 months and are quantitatively the first sector to move in a credit spread widening scenario due to their superior trading liquidity compared to other sectors.
Our systematic trading model measures both portfolio and individual bond liquidity, with LQD scoring above 85% for its ability to move 20% of an individual holding within a week in every analysis.
For detailed systematic trading model indicators for the LQD fund or any other fund/portfolio, contact me at: larry.d@G-255.com
Earnings Summary for the Week of August 1
Based on results reported this morning, 32 of the world's 255 largest corporate debt issuers are reducing leverage, while 51 are adding net debt—the widest interim disparity among major borrowers since 2012.
Fourteen issuers have seen balance sheet changes. Ten of the world's largest corporate balance sheets, which were trimming debt last quarter, are now adding net debt. Conversely, five 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) BBB TMT, (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.
G – 255 Issuers reporting results Tuesday AM
Stellantis (STLA Baa3/BBB- attractive short ) Ugly
Orange (ORAFP Baa1/BBB+ attractive long to attractive short) Bad
Barclays BACR Baa1/BBB+ attractive long) Very Good
Astra Zeneca (AZN attractive short to attractive long) Very Good
Enterprise Products (EPD A3/A- attractive short) Good
Heineken (Baa1/BBB+ - attractive short) Ugly
Please see page 6&7 for this AM's earnings digest
Systematic Trading Model Indicators and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 997 bonds are within 20% of their 52-week tight or wide spread levels, 69% 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 ±7.72 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. 6 new attractive long new-issue indicators were published this week. Last week saw a recovery in US mutual fund corporate bonds (both IG and HY) inflow.
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
All Energy (Single A, BBB and BB)
Single A Consumer
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
Dallas Fed July Manufacturing Outlook survey was 0.9 vs -12.7 in June
Capacity Utilization was 17.3 that is the highest reading since May 2022.
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +3% above average
-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 99% of top 100 issuer volume and 80% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +7% above average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 55% of top 25 issuer volume and 46% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged @ 50 bp
U.S. IG Cash Spreads: Ranged from (+2bp) wider to (-2bp) tighter; Single A and BBB US financials outperformed. Single and BBB TMT underperformed Monday.
CDX HY Index: unchanged @ 107.6 (per Bloomberg)
HY Cash Bonds: HY Healthcare underperformed on Monday. Consumer discretionary was strongest performer.
High-Yield Activity
- Dealers bought $ 1.1 billion of HY bonds Monday.
Most Bought HY Bonds
- Coreweave (CRWV B1/B)
Most Sold HY Bonds
- Nissan (NSANY Ba2/BB attractive long)
Investment-Grade Activity
- Dealers bought $200mm of IG bonds Monday.
Most Sold Sector: Big 6 banks
- Bank of America (BAC, A1/A- attractive short)
- Goldman Sachs (GS, A2/BBB+ attractive short)
Most Bought Sector: BBB TMT
- Broadcom (AVGO, Baa1/BBB+ attractive long)
- T-Mobile (TMUS 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 135 bonds ($195.3 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
1501 bonds ($1.55 trillion) are considered overvalued by the stochastic credit trading model with 946 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $734 billion in overvalued market capital across 295 bonds, with 207 short indicators.
Single A and BBB industrials $184.4 billion, in overvalued market capital across 149 bonds, with 100 short indicators.
Single A, BBB and BB energy $241.5 billion in overvalued market capital across 161 bonds, with 104 short indicators.
Single A Consumer $107.6 billion in overvalued market capital across 89 bonds, with 58 short indicators
Issuer News
Union Pacific Corp (A3/A- attractive short ) deal price is said to be $320/share in a two-thirds stock/one-third cash transaction to acquire Norfolk Southern (NSC Baa1/BBB+ attractive short ). Yesterday we noted "Both issuers have reported results." That was inaccurate. NSC reports results this AM. The systematic trading model indicator is to short bonds of either issuer. UNP equity is a long trade at its current $225/share price.
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. Given the number of issuers re-levering (137 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 now minimally wider YoY.
UST 10Y rates are +23.7 bp higher YoY and -15.7bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 65th trading day in 74. 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 Monday 4 G-255 issuers sold 7 bonds totaling $7.14 billion in market capitalization. All 4 of those issuers either maintain a balance sheet with net cash or are de-levering. All of IG deals (Royal Bank of Canada (RY), Deutsche Bank (DB) and Ally Financial (ALLY) came at levels the systematic trading model saw as attractive.
The DB 4.95 08/04/31 and RY 4.696 08/06/31 are considered the most attractive owing to trading liquidity.
9 of 27 the bonds sold in the past 2 weeks totaling $36.45 billion in market cap have already reached our systematic trading model indicator avoid trading level.
General Motors Finance (GM ) sold €4Y bonds on Monday.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 946. 55 more than Monday.
51 attractive long indicators: 14 fewer than Monday.
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:
17 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 25, 2025
Closed Positions: The long/ short basket trading exited the GE Aerospace (A3/A-) GE 4.9 01/29/36 reached its avoid trading level on Monday
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 Monday – 55%
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
GE Aerospace (A3/A-) GE 4.9 01/29/36 reached its avoid trading level on Monday
This morning model indicators add new issue 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
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 28, 2025)
Total Trades: 135 (1% of total trades).
Performance Summary:
Long Indicators: 98/104 reached avoid-trading levels, tightening by -9.38 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 6 tightened by -7.44 bp.
Remaining Shorts: 4 tightened by -18.53 bp.
Average Spread Movement: ±7.72 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.
Monday's earnings results
Enterprise Products (EPD A3/A- attractive short) Earnings Summary: EPD reported 2Q revenue that fell -15.7% YoY and operating income that rose 23% YoY.
• 2Q Transport volume rose 6% YOY to 13.6mm bbl/day
• 2Q Refined volume rose 6% YoY to 8.2mm BPD
• 2Q Natural Gas volume rose 9% YoY to 20.3 BTUs / dau
• Company did not change guidance owing to the price volatility in the energy markets.
Financial Position:
• 2Q operating cashflow was $2.1 bil v. $1.6 bil in 2Q 2024.
• 2Q free cashflow was $1.9 bil v. $1.8 bil YoY.
• 1H cash distributions and share repurchase rose 7% YoY to $1.9 billion
• While the company did release balance sheet information today they did communicate Total debt principal outstanding at June 30, 2025 was $33.1 billion which is $1.6 billion higher QoQ and $1.7 bil YoY
Trading Model Indicator: There are 25 ENI EPD USD bonds that total $25.2 billion. Only all but 2 of the 20 EPD bonds that have a minimum of $900mm of market capital have overvalued systematic credit trading model indicators. Non have attractive attractive short trading indicators.
Equity Indicator: EPD equity is an attractive long trade @ its current $31.15 per share price.
Heineken (Heineken (HEIANA), Baa1/BBB+, Avoid) Earnings Summary: Heineken reported 2Q revenue fell -4.3% YoY, and net earnings of €859 v a loss a year ago.
• 1H beer volume fell -1.2% YoY
• 2Q beer revenue fell -6% YoY
Financial Position:
• 1H Cashflow from operations was €2.802 bil v. $2.916 mm in 1H 2024.
• 1H free cash flow was €257mm x. €655mm While dividends and share repurchases rose to € 946mm from €822mm in 1H 2024 .
• Overall net rose by €811 mm HoH and €1.202 bil YoY.
Trading Model Indicator: There are only 3 secondary liquid USD HEIANA bonds in circulation and only 1 has market capitalization above $650mm.
Equity Indicator: HEIA NA equity is an attractive short trade above €80/share.
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.