Systematic Credit and Equity G-250 Trading Indicators for June 23, 2025
Good morning. Waller's Friday Fed rate cut hints lack the market impact of Trump-related headlines, such as tariff speculation and US/Iran headlines.
Market Headlines: "Credit Risk Jumps Most in Weeks, Several Borrowers Brave Market"
A credit risk selloff occurred overnight, but quantifying its impact on US Investment Grade (IG) and High Yield (HY) markets remains challenging.
San Francisco Fed President Mary Daly noted balanced risks to US employment and price stability, calling current Fed policy "well-positioned." This contrasts with Waller's Friday remarks but aligns with the FOMC Dot Plot, showing seven members expecting no cuts and ten forecasting two by December. Spoken Fed policy shifts await June and July data.
May's PCE, Personal Spending, and Income information, due Friday, will be the next data point. UST movements are currently driven more by macro headlines than pre-Friday data. Earnings from Kroger (KR, Baa2/BBB, attractive long) on Friday and FedEx (FDX, Baa2/BBB, attractive short) tomorrow suggest 2Q corporate earnings performance mirrors a lackluster 1Q. Jefferies (JEF, non-G-255) reports Wednesday, offering insights into global capital markets and investment banking profitability.
54% of G-250 issuers are re-leveraging as of last Friday, with shareholder returns growing twice as fast as revenue among major borrowers.
Trading Strategy and Balance Sheet Analysis
Our Q1 balance sheet analysis of global banks—US Big 6, regional, Canadian, European, French, UK, and single-A/BBB-rated TMT—supports our trading recommendations. Japanese banks stand out with robust balance sheets. The trading model output show: Long Yankee Banks / Short US Money Center banks, Long single-A TMT/Short single-A Healthcare. We will continue to review sector operating metrics and and balance sheets on days when there are no reported earnings.
As noted on page 4, 81% of our 122 indicators (marked to market by TRACE prints) hit their ±6.88 basis point target.
Portfolio Trading Model Indicators:
Of 6,000+ bonds tracked, 535 trade near 52-week tight or wide spread levels, 7% below historical averages. With low retail credit inflows for the week ending June 18, our model adjusted to:
-62.5% long / 17.5% short strategy.
-20% front-end allocation, with 67% in floating-rate notes (FRNs) maturing within three years, targeting undervalued, deleveraging bonds.
The number of attractive short indicators are near 2 year averages.
Kroger's Friday's reported results show the "Trump Trade" persists as long as sideline cash remains. KR's equity hit near-record highs Friday despite a mediocre Q1.
Key Trading Issues Friday
Trading volume fell 35% due to pre-holiday (Thursday) exits. Despite lower volume and Middle East headlines, selective buying of IG and HY bonds occurred Friday.
Friday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading
Volume: 45% below average.
G-255 Issuers: Represented 96 of the top 100 traded issuer bonds, accounting for 97% of top 100 issuer volume and 80% of total TRACE volume.
High-Yield (HY) Trading
Volume: 37% below average.
G-255 Issuers: Represented 17 of the top 25 traded bonds, accounting for 66% of top 25 issuer volume and 52% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged on Friday @ 56.2 bp.
U.S. IG Cash Spreads: were unchanged on Friday with consumer bonds outperforming and BBB energy bonds underperforming.
CDX HY Index: Rose by 0.2 bp 106.2, per Bloomberg).
HY Cash Bonds: BB Healthcare and Energy outperformed, while BB financials underperformed.
High-Yield Activity
End User bought $400mm of HY bonds on Friday.
Most Bought HY Bonds by End Users
Venture Global LNG (VENLNG, B1/BB attractive long)
Most Sold HY Bonds by End Users
Altice (SFRFP, Caa2/D), Post Moody's downgrade an apparent CDS trigger.
Investment-Grade Activity
End users net bought $1.1 billion of IG bonds at wider spreads on Friday.
Most Bought End-User Bonds
Lloyds Banking Group (LLOYDS, A3/BBB+, attractive long)
Most Sold Issuer Bonds
Bank of Nova Scotia (BNS, A2/A-, attractive long)
Inflation, Economic Data, and Interest Rates
Philadelphia Fed general business conditions were -4 June, flat when compared to April
-New orders fell to 2.3 vs 7.5
-Shipments rose to 8.3 vs -13.0
-Unfilled orders rose to 9.3 vs 4.9
-Delivery time rose to 13.6 vs -9.2
-Inventories fell to 3.6 vs 9.7
-June prices paid fell to 41.4 vs 59.8
- Prices received fell to 29.5 vs 43.6
UST 10Y Rates: Down 18 bp YTD to 4.39%.
Attractive Trading Sectors
Long Opportunities
-None identified. However, 212 bonds ($315.7 billion) are undervalued, with 90 attractive long indicators by the trading model. No trading sector represents more than 17% of the total attractive bonds from our trading model over the weekend.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $678.2 billion in overvalued market capital across 268 bonds, with 61 short indicators.
BBB Autos: $85 billion in overvalued market capital across 71 bonds, with 9 short indicators.
Single A Healthcare: $140.2 billion in overvalued market capital across 97 bonds, with 31 short indicators.
Issuer News
Bank of New York Mellon Corp (BK, Aa3/A Attractive Long) initiated discussions with Northern Trust Corp (NTRS, A2/A) last week regarding a potential merger to enhance operational synergies and market presence.
Con Edison (ED, A3/A-, Attractive Short) implemented an 8% voltage reduction in southeastern Queens to facilitate ongoing repairs. Customers in affected areas are requested to refrain from using high-energy appliances, including washers, dryers, and microwaves, until repairs are completed.
British Airways and Singapore Airlines suspended flights to the Persian Gulf due to operational constraints and airspace restrictions. British Airways canceled or rerouted flights to Dubai, Doha, and Bahrain. Similarly, Japan Airlines and Air India are rerouting flights to avoid airspace over the Persian Gulf and Gulf of Oman, resulting in extended travel times. Delta Airlines (DAL, Baa2/BBB+, Attractive Long) is scheduled to report earnings on July 11.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered slightly more than 50% of the widening observed from November 12, 2024, to April 10, 2025. However, US credit spreads were wider last week.
Valuation: U.S. credit is currently fairly valued but lean closer to the overvalued level.
Global Equity Correlation to IG Credit Spreads
Friday marked the 37th of 41 trading days when US credit followed US equity prices slightly wider. The performance disparity between the 2 markets continues to narrow minimally.
S&P 500 is up 0.95% MDT while the DJIA is -.16% lower.
US credit spreads are slightly tighter over the the same time period.
YTD the S&P is 1.47% higher
DJIA is down -79%
New Supply, Bond Maturities, and Credit Fund Inflows for June
The week of June 20 saw below average supply and June 2025 supply in both the US and Europe ($59 billion in total).
US fund flows were reported by Lipper for the week ended June 18 showed material slowing in retail inflows into US credit funds although the past 4 weeks have shown over $10 billion of inflow in the US.
Systematic Trading Model Indicators and Strategy
Model Output
445 attractive short indicators: 10 more than Friday.
90 attractive long indicators: an increase of 48 attractive long indicators from Friday but sill 25% below normal.
Weekly Trading Strategy (Ending June 27) Model output changes slightly until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Add shorts of relevering issuers with the deepest discount from their model avoid point.
Systematic Portfolio Trading Model Indicators: Add 5 short positions for each 4 additional long positions or do not replace 1 of every 5 long positions that reach their avoid trading point.
Systematic Credit Indicators
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.
Most Recent Model Trading Indicators
Union Pacific (UNP, A3/A-): UNP 5.60% 12/01/2054 and UNP 5.1% 2/20/35 are two of 10 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
Sample Trade Performance Report (January 4, 2025 – June 20, 2025)
Total Trades: 122 (1% of total indicators).
Performance Summary:
Long Indicators: 70/92 reached avoid-trading levels, tightening by -9.95 bp.
Short Indicators: 25/30 reached avoid-trading levels, widening by +5.24 bp.
Remaining Longs: 22 widened by +0.91 bp.
Remaining Shorts: 5 tightened by -3.4 bp.
Average Spread Movement: ±6.62 bp in the indicated direction.
Success Rate: 81% of indicators reached avoid-trading levels (9% below normal).
Notes:
Initial indicators based on TRACE print (or new issue price) at indicated date.
Avoid indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
21 long indicators hit avoid-trading levels, contributing -1.46 bp to overall spread tightening for the 70 long trades.
1 short indicator hit avoid trading level (+5 from model indicated level)
Overall performance improved from ±4.91 bp to ±6.22 bp across 122 sample trades.
Earnings Season Insights
Kroger (KR, Baa1/BBB, attractive long)
Kroger (KR) reported Q1 2025 results with comparable store sales (excluding gasoline) up 2.5% YoY. Total revenue remained flat, while reported operating income increased 6% YoY. The company issued 2025 guidance projecting comparable store sales (without fuel) of 2.25%–3.25% and free cash flow of $2.8–$3.0 billion. Reported earnings were unchanged YoY.
Financing
In Q1 2025, KR generated just over $1 billion in free cash flow. Dividends and share repurchases totaled higher, with returns to shareholders up 19% YoY. Despite increased shareholder returns, KR continued to generate free cash flow and deleverage its balance sheet.
Model Indicator
Of the 22 liquid KR secondary USD bonds in circulation, none are deemed attractive longs or undervalued by our trading model. With KR equity trading within 5% of its all-time high, the model does not view KR equity as attractive at Friday's closing price.
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.