Systematic Credit and Equity G-250 Trading Indicators for June 24, 2025
Monday's US trading followed the trend set in Asian and European markets, with credit spreads opening wider and tightening throughout the day. Front-end bonds ended slightly tighter, while the long end widened. A "Trump Truce Trade" contributed to a decline in oil prices (-$11/bbl), likely shifting focus back to supply/demand metrics.
Credit markets diverged from equities, which rose, marking only the 5th such divergence in the past 2.5 months. Trading volumes remained low due to dormant non-US capital flows, though no significant withdrawals were observed in bank deposits, US equities, or USD corporate bond ownership.
US money market funds, holding $6.7 trillion, continue to provide a cash buffer for equity dip-buying, even at near-record valuations. The market trades at ~30x earnings, with 20% at 40x, 15% at 12x forward earnings, and the middle two-thirds at ~31x earnings.
Credit and Equity Valuation Dynamics
Two key quantitative factors link US equity valuations to corporate credit:
Shareholder Returns: Share repurchasing and dividends are growing at 13% annually among the largest issuers, despite regulated industries (Banks and Utilities) comprising over 60% of the large-cap market. This growth outpaces revenue growth by over 2x (see page 6).
Funding Gaps: Only 40% of the 255 largest global corporate borrowers generate sufficient cash flow to cover shareholder returns. Over 60% of the remaining payout is funded by corporate borrowing, impacting bondholders.
Corporate balance sheet analysis for non-financials is detailed on page 6, post-Kroger (KR Baa2/BBB+, attractive long) results and prior to Carnival (CCL B1/BB+, attractive long) and Federal Express (FDX Baa2/BBB, attractive short) results.
Federal Reserve Member Headlines:
Fed Member Michelle Bowman expressed conditional support for lowering interest rates as early as July, stating, "Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting to bring it closer to its neutral setting and to sustain a healthy labor market." (Bloomberg, corrected). More significantly, her comments on reducing bank capital requirements (page 4) suggest potential Fed policy shifts, which could further fuel bank share buybacks and dividend growth, keeping equity cash returns at historic high levels.
Trading Strategy and Balance Sheet Analysis
Q1 balance sheet analysis of global banks (US Big 6, regional, Canadian, European, French, UK, and single-A/BBB-rated TMT) supports our trading indicators. Japanese banks exhibit notably robust balance sheets. Trading model outputs continue to indicate:
Long Yankee Banks / Short US Money Center Banks
Long single-A TMT / Short single-A Healthcare
We continue to review sector operating metrics and balance sheets on non-earnings days. Of 122 indicators (marked to market by TRACE prints), 81% achieved their ±6.63 basis point target (page 4).
Portfolio Trading Model Indicators
Of over 6,000 bonds tracked, 460 trade near 52-week tight or wide spread levels, with 17% below historical averages. With low retail credit inflows for the week ending June 18, the 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
-Attractive short indicators are 10% below 2-year averages.
Key Trading Issues Monday
Credit spreads opened wider but tightened as concerns over Israel/Iran conflicts eased. Only one G-250 new issuer (BNP AT1) was issued Monday, with backlog from Nomura, Toyota, and Westpac announced today. US trading volume remains 15% below average.
Monday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading
Volume: 12% below average.
G-250 Issuers: Represented 93 of the top 100 traded issuer bonds, accounting for 92% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
Volume: 13% below average.
G-250 Issuers: Represented 16 of the top 25 traded bonds, accounting for 69% of top 25 issuer volume and 55% of total TRACE volume.
Market Movement
U.S. CDX Index: tightened (-1.4bp) Monday @ 54.8 bp.
U.S. IG Cash Spreads: were (-2bp) tighter to (+2bp) wider with Single A financials outperforming and Energy bonds underperforming.
CDX HY Index: Rose by 0.2 bp 106.4, per Bloomberg).
HY Cash Bonds: BB Healthcare while BB Consumer and TMT bonds underperformed.
High-Yield Activity
Dealers bought $1.5 billion of HY bonds on Monday.
Most Bought HY Bonds by End Users
Imola Merger Corp (IM, Ba3/BB) was the only issuer bond that saw more than $15mm of net buying.
Most Sold HY Bonds by End Users
EchoStar (SATS, Caa1/B attractive short).
Investment-Grade Activity
Dealers net bought $2.1 billion of IG bonds on Monday.
Most Bought End-User Bonds
JP Morgan Chase (JPM, A1/A, attractive short)
Most Sold Issuer Bonds
Citigroup (C, A3/BBB+, attractive long)
Inflation, Economic Data, and Interest Rates
S&P Global PMI services purchasing managers' index 53.1 for June v 53.7 in May
Employment rises to 51.9 vs 51.8 in May
S&P Global manufacturing purchasing managers' index 52 for June v 52 in May.
Output rises to 51.5 vs 49.4 in May
Employment rises vs May
Attractive Trading Sectors
Long Opportunities
-None identified. However, 222 bonds ($330.9 billion) are undervalued, with 65 attractive long indicators by the trading model. Single A TMT is the most undervalued trading sector from a long perspective according to the trading model.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $673.1 billion in overvalued market capital across 266 bonds, with 40 short indicators.
BBB Autos: $81.1 billion in overvalued market capital across 67 bonds, with 8 short indicators.
Single A Healthcare: $130.3 billion in overvalued market capital across 91 bonds, with 25 short indicators.
Issuer News
Bank of New York Mellon Corp (BK, Aa3/A Attractive Long) Northern Trust Corp (NTRS, A2/A) stated Monday. plans to remain a standalone company after Bank of New York Mellon Corp. approached it about a possible merger.
FiServ (FI, Baa2/BBB, Attractive Short) is launching its own stablecoin, FIUSD, and partnering with PayPal and Circle to develop products for financial institutions and merchants within its ecosystem.
Global Money Center Banks Federal Reserve Vice Chair Michelle Bowman warns that the current approach to leverage ratio requirements has led to "unintended market consequences" The Fed is set to unveil potential changes in bank Holdco capital requirements in July.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered slightly slightly less 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 leans closer to the overvalued level.
Global Equity Correlation to IG Credit Spreads
Monday marked just the 5th trading day in 42 when US credit did not corelate to US equity prices. The performance disparity between widened back toward end of May levels.
S&P 500 is up 1.92% in June while the DJIA is +.74% higher.
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
Just one G–250 issue on Monday BNP (BNP Ba1/BBB-) sold $1.5 bil NC10Y perp @ 7.45% that the model saw as very attractive.
MDT G -250 supply (17 issuers / 42 transactions) $32.7 billion
YTD G-250 supply (161 issuers / 406 transactions) $342 billion with 34.3% coming from non – financial issuers
Systematic Trading Model Indicators and Strategy
Model Output
395 attractive short indicators: 50 fewer than Monday with 40% of the decline in attractive short trading indicators
coming from the Consumer Sector.
65 attractive long indicators: A drop of 35 attractive long indicators from Monday with two thirds of the decline in long trading indicators coming from BBB Energy and BBB Healthcare.
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.
Enterprise Products (EPD A2/A-) EPD 2.8 01/31/30 short indicators reached its avoid trading level on Monday.
The model published the new BNP (BNP Ba1/BBB-) $1.5bil variable AT1 @ new issue price with -8bp of tightening or .5 pt of price appreciation in the trades.
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
Following Kroger (KR, Baa1/BBB, Attractive Long) results reported on Friday, 176 of the world's largest 190 non-financial corporate debt issuers have released interim results. Excluding high-tech, healthcare, and utilities sectors, total revenue remained flat, with operating income growth below 5%.
In the first reporting period of 2025, net cash generated by these 176 issuers was approximately 20% lower than the $538 billion allocated to share repurchases and dividend payouts.
While many technology and healthcare issuers hold excess cash for shareholder returns, over 70% of the 176 issuers relied on the corporate bond market to finance these distributions.
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.