Systematic Credit and Equity G-255 Trading Indicators for July 25, 2025
Good morning: Absent any meaningful new G-255 supply, US credit was seen grinding tighter and higher as retail fund inflows in the week ended July 23 were better than than the modest flows in either direction we saw from ETFs for the week ending July 22. Trading in IG was slightly below average, while HY trading where there was more new supply saw volumes well above average.
Reported earnings are finally dominating the trading seen and we use two exampled this AM. Deutsche Bank (DB Baa1/BBB). DB equity is at a 10 year high for a reason. The bank hasn't been in as strong a financial position as it is now in 10 years. DB's CET 1 capital ratio is 14% and it has more cash than debt. Company's mandate is clear to push the investment bank/capital markets side of the house and by anyone's estimation, that's exactly what DB is doing. DB credit spreads are at 52 week tights, even tighter than last November. Why DB not rated single A? Even Moody's and S&P couldn't provide a coherent answer to that question.
Now moving on the other side.
Honeywell reported 2Q revenue that 8% YoY, and net earnings that were flat.
• 2Q Aerospace Technologies revenue rose 13% YoY
• 2Q Industrial Automation revenue fell 4% YoY
• 2Q Building Automation revenue rose 5%
• 2H "Organic" revenue guidance rose to 4-5% from 2-3% while "adjusted earnings" guidance rose 3% to 6-8% for the year.
Financial Position:
• 1H Cashflow from operations rose 1% to $1.9 bil Deposits fell by $3.6 billion QoQ and $4.5 billion YoY to $148 billion.
• 1H free cash flow after acquisitions was -$1.888 bil. While dividends and share repurchases rose by $1.6 bil to $2.446 bil.
• Overall Honeywell (HON) net debt has grown 250% over the past 3 years to $25.8 billion while operating income has grown 10% over the same period to $1.8 billion for the quarter.
Trading Model Indicator: There are 28 secondary liquid USD HON bonds only 5 have short trade indicators from our systematic model. This owes to below 2% coupons on 4 other bonds. The HON 4 1/2 01/15/34 has the greatest spread widening potential according to our trading model.
Equity Indicator: The trading model sees (HON) equity as a short trade at is current price of $225/share.
Not often does our trading model spit out attractive short indicators for both the equity and the debt of an issuer. But it did it did so three time overnight. (hence the delay in this AM's report) Intel (INTC) indicators for both the equity and Keurig Dr. Pepper (KDP) in addition to Honeywell(HON). All had negative cashflow grwoth and are adding balance sheet debt at a pace twice as fast as historic operating earnings growth.
The overall US credit market systematic trading model indicator is still overvalued. It hasn't hit "tilt" as it did in March and November of 2024.
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 27 of the world's 255 largest issuers of corporate debt are reducing leverage and 45 are adding net debt. That is the largest disparity on an interim basis for the world's largest borrowers since 2012.
13 issuers have seen balance sheet change. 9 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, A rated Consumer 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.
The good the bad and the ugly:
G – 255 Issuers reporting results Thursday
TotalEnergies (TTEFP Aa2/A- attractive short) Ugly
Lloyds Banking Group (LLOYDS A3/BBB+ attractive long) Good
BNP Paribas SA (BNP Baa1/A- attractive long) Very Good
Deutsche Bank (DB Baa1/BBB attractive long) WOW!
Union Pacific (UNP A3/A- attractive short ) OK
Hyundai Motors (HYNMTR A3/A- attractive long) Good
American Airlines (AAL BA2/BB- attractive long) Good
Honeywell (HON) A2/A-, attractive short) Ugly
Roche (ROSW Aa2/AA+ attractive long) Good
Keurig Dr. Pepper (KDP Baa1/BBB attractive short) Bad
LVMH (MC FP Aa3/AA- attractive long) Good
Nestle (NESVNX Aa3/AA- attractive long to attractive short) Ugly
BT Group (BT/A Baa2/BBB attractive short) Ugly
Intel (INTC Baa2/BBB attractive short ) Bad
G – 255 Issuers reporting results Friday
Eni Spal (ENIIM Baa1/A- attractive long) Good
Volkswagen (VW Baa1/BBB+ attractive short) Good
Charter Communications (CHTR Baa3/BBB- attractive long) Bef. Mkt
AON GLOBAL HOLD (A- / Baa2 attractive short) Bef. Mkt
HCA (HCA Baa3/BBB- attractive short ) Bef. Mkt
Centene (CNC Ba1/BBB- attractive long) Bef. Mkt
Systematic Trading Model Indicators and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 924 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.
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), 91% achieved ±5 bp targets, averaging ±7.68 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 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
Weekly jobless claims for the week ending July 19 fell 19k YoY to 218k. The 4 week average of 224.5k is 10k below the same number a year ago. 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.
S&P Composite US purchasing managers' index for July.
Index rises to 54.6 from 52.9 in June; year ago 54.3
-Highest reading since Dec. 2024
Employment falls to 52.2 vs 52.5 in June
-Fifth consecutive month of expansion
New orders rise vs prior month
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -8% below average
-G-255 Issuers: 94 of the top 100 traded issuer bonds accounted for 93% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +15% above average
-G-255 Issuers: 13 of the top 25 traded bonds accounted for 53% 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 (-1 to -3bp) tighter; BBB Financials. No trading sector was wider on Thursday.
CDX HY Index: fell -.1pt higher @ 107.6 (per Bloomberg)
HY Cash Bonds: HY Healthcare Underperformed. No other trading sector was lower on the day.
High-Yield Activity
- End Users bought $ 300 million of HY bonds Thursday.
Most Bought HY Bonds
- Nissan Credit (NSANY Ba2/BB attractive long)
Most Sold HY Bonds
- Olympus Water New Issue (SOLEIN Caa2/CCCC)
Investment-Grade Activity
- End users bought $1.1 bil of IG bonds Thursday.
Most Sold Sector: Single A and BBB Healthcare
- HCA (HCA, Baa3/BBB- attractive short)
- United Healthcare (UNH, A1/A+ attractive shorttf)
Most Bought Sector: US Regional Banks
- American Express (AXP, A2/A- attractive short)
- Capital One Financial (COF Baa1/BBB+ attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 157 bonds ($224.8 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
1493 bonds ($1.53 trillion) are considered overvalued by the stochastic credit trading model with 865 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 295 bonds, with 168 short indicators.
Single A and BBB industrials $186.1 billion, in overvalued market capital across 150 bonds, with 81 short indicators.
Single A, BBB and BB energy $238.1.billion in overvalued market capital across 164 bonds, with 110 short indicators.
Single A Consumer $105.3 billion in overvalued market capital across 87 bonds, with 47 short indicators
Issuer News
None away from earnings results.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 53% 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, but just barely.
UST 10Y rates are +17.5 bp higher YoY and -15.3bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 63rd trading day in 72. 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
No new G – 255 supply in any currency On Thursday, 12 G-255 issuers have come to market post reporting results. 10 of those issuers are using balance sheet to return capital to shareholders.
US fund flows for the week ended July 23, compared to a week earlier, according to LSEG Lipper.
Short and intermediate investment-grade bonds: $1.74b inflow vs. $1.19b inflow
High-yield notes: $912.7m inflow vs. $875.7m inflow
Treasuries: $618m inflow vs. $2.25b inflow
US leveraged loans: $716m inflow vs. $490m inflow
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 864. 4 more than Thursday.
60 attractive long indicators: 8 fewer than Thursday.
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:
15 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 Barclays (Baa1/BBB+) BACR 5.367 03/25/31 on Thursday
Enter New Longs: Trading model indicators 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 Friday – 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
Barclays (Baa1/BBB+) BACR 5.367 02/25/31 reached its reached its avoid trading level on Thursday
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 24, 2025)
Total Trades: 135 (1% of total trades).
Performance Summary:
Long Indicators: 95/104 reached avoid-trading levels, tightening by -9.49 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 9 tightened by -7.35 bp.
Remaining Shorts: 4 tightened by -16.25 bp.
Average Spread Movement: ±7.74 bp in the indicated direction.
Success Rate: 81% 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.