Systematic Credit and Equity G-255 Trading Indicators for August 13, 2025
Good morning! While markets overreact to Tuesday's US CPI data, we expect PPI data today (We think!). Yesterday's inflation figures set the stage for September's CPI release, scheduled for the 12th (again we think!), with the US Federal Reserve meeting on the 17th next month.
Regardless, the US Central Bank's rate decision next month is more or less a "fait accompli" as political dynamics surrounding foreign trade, corporate earnings, the US economic outlook, and global perceptions of the US increasingly influence the global financial system, posing a significant threat to the world's capital markets.
Our Systematic Trading model's short trade indicators have surged above 900, the highest since November 2024. Notably, all four past peaks and troughs in credit valuation have coincided on the the day that model trading indicators (long or short) hit their peak or trough. Currently, credit markets are about 20% away from being "significantly overvalued" in terms of investment-grade credit spreads or high-yield debt prices. The model does not view equity trading levels for the 255 largest corporate debt issuers as "significantly overvalued." Only 65% of these issuers' equity prices are at or near 52-week highs. The mathematical explanation on equities is technology and tech-related constituents weigh over twice as heavily in the S&P 500 compared to the G-255 group of issuers on an unweighted (or market cap-weighted) basis.
CPI Data: The July core MoM increase highlights why our trading model avoids relying on federal government data:
Data is "seasonally adjusted."
Data collection is "selective."
CPI component weights are inconsistent.
Still, the minimal impact of US tariffs on inflation appears short-term, as we've previously noted. We are in the middle stages of poorly planned and communicated trade tariffs. Report earnings data from the world's 255 largest issuers of corporate debt present an entirely different perspective than what we are seeing written by financial "experts."
Auto Industry: Global unit volume declines in Q2 2025 led to a -1% pricing drop for new vehicles. This trend will shift as tariffs persist.
Branded Food Industry: Unit volume growth fell YoY in Q2 2025, with ~2% YoY pricing growth due to tariffs. This will also evolve with prolonged tariff implementation.
Healthcare/Pharmaceutical Industry: Shows under 6% YoY pricing changes, which is understated. Companies like United Healthcare, HCA, and Eli Lilly face rising costs from tariffs and reduced government healthcare spending. Price increases will likely accelerate.
Transportation Industry (rails and direct delivery): Flat volumes in Q2 2025, with 1-2% pricing growth, as US rail car deliveries hit a four-year low (+4.5% YoY).
US Retail Industry: Nearly flat pricing, with over 15,000 store closures expected by December 31. Johnson Redbook data indicates retailers plan price hikes as tariffs take hold in H2 2025.
Even non-tariffed sectors, like cable and wireless, struggle with pricing.
Energy: Declining gasoline/energy costs have reduced energy surcharges YoY.
Used Car Prices: YoY comparisons show prices rising 0.3–0.45% monthly, a trend likely to influence core CPI moving forward.
In summary, the 0.3% MoM core CPI figure serves as a baseline for future trends, not a definitive measure of tariff impacts. It's too early to draw firm conclusions given the recent tariff implementation.
Systematic Trading Model:
The next move is still tighter/higher in credit according to this morning's systematic trading model indicators.
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 144 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.50 bp per trade.
Recent Activity: Between June 30 and August 12, 2025, 21 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. We saw strong inflows into US corporate bond ETFs and Mutual Funds for IG last week. The trading model added another new issue long trade on Tuesday.
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
Underlying US inflation accelerated in July, with the core consumer price index increasing 0.3% from June, according to Bureau of Labor Statistics data.
Sales at stores open at least a year, or same-store sales, rose 5.7% in the Aug. 9 week compared to a year earlier, Johnson Redbook says. August sales expected to be up 6.2% over the same month of the previous year
"As retailers begin to report their second-quarter earnings in the coming weeks, they are approaching the second half of the year with caution. They anticipate higher costs due to tariffs and are planning price increases to offset these adjustments."
Tuesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -7% below average
-G-255 Issuers: 93 of the top 100 traded issuer bonds accounted for 86% of top 100 issuer volume and 67% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -12% below average
-G-255 Issuers: 11 of the top 25 traded bonds accounted for 55% of top 25 issuer volume and 35% of total TRACE volume.
Market Movement
U.S. CDX Index: -1.5bp @ 50bp
U.S. IG Cash Spreads: were (-1 to -4bp) tighter with BBB credit outperforming.
CDX HY Index: +.2 @ 107.3 (per Bloomberg).
HY Cash Bonds: TMT and Utility issuer HY debt were the best performing sectors on Tuesday.
High-Yield Activity
- Dealers bought $900mm of HY bonds Tuesday.
Most Bought HY Bonds
- Pike Corp (PIKE B3/B)
Most Sold HY Bonds
- Novelis Corp (HNDLIN B1/BB)
Investment-Grade Activity
- Dealers sold $200mm of IG bonds Tuesday.
Most Bought Sector: US Big 6 Banks Banks
- Wells Fargo (WFC, A1/BBB+ attractive short)
- Bank of America (BAC, A1/A attractive short)
Most Sold Sector: BBB TMT
- Rogers Communication (RCI, Ba1/BBB- attractive long)
- Intel (INTC Baa2/BBB attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, Single A rated global Autos, BBB TMT, BBB Energy, and Euro Yankee Banks. Overall model indicators 148 bonds ($207.5 billion) are considered undervalued by the stochastic credit trading model, with 48 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1515 bonds ($1.61 trillion) are considered overvalued by the stochastic credit trading model with 956
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $740.9 billion in overvalued market capital across 296 bonds, with 166 short indicators.
Single A and BBB Industrials: $163 billion, in overvalued market capital across 139 bonds, with 95 short indicators.
Single A and BB Energy $172.3 billion in overvalued market capital across 104 bonds, with 77 short indicators.
Single A Consumer $110.8 billion in overvalued market capital across 94 bonds, with 64 short indicators.
Issuer News
Among the 255 largest global corporate debt issuers, 90 are reducing leverage, while 99 are increasing net debt. Twenty-six issuers saw 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. Fifty-Five issuers are yet to report for June–August.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 41% 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 tighter YoY and wider YTD.
UST 10Y rates are +44.8 bp higher YoY and -28 bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlated for the first trading day in 3 and the 135th in 157 trading days in 2025. tighter. While credit spread movement has an 80% correlation with equity price movement, the magnitude of these moves has changed markedly over the past two years. This owes to the world's largest corporates using balance sheet to fund equity share repurchases and dividend payouts.
We also note that Celanese (Ba1/BB+ attractive short corp/attractive long equity) saw its share price drop (-13%) after reporting earnings Monday night.
New Supply, Bond Maturities, and Credit Fund Inflows for August
Tuesday saw 2 more well-priced new supply G-255 issuers selling 5 bonds totaling $2.9 billion. The Simon Property (SPG A3/A) $800mm 5.125% 10/1/35 bond had the largest new issue concession according to trading model indicators.
Month-to-Date Issuance: G-255 supply hit $43.625 billion for the Month of August from 22 issuers (51 bonds). Thus far, 6 de-levering G-255 issuers (the same number of attractive balance sheets that came to market after 15 July) have sold 19 bonds totaling $17.4 billion in August.
Systematic Trading Model Indicators and Strategy
Model Output
956 Attractive short indicators . 134 more than Tuesday and 76% above the 200 day moving average.
48 attractive long indicators: -10 from Tuesday and within 25% of "attractive short" overall credit market indicator.
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:
20 long trades reached their avoid trading levels in the past 35 days and were replaced by 9 new issue and new short trade indicator.
Systematic Credit Trading Strategy August 13, 2025
Closed Positions: Tuesday the long/ short basket trading exited the Barclays (Baa1/BBB-) BACR FRN 11/11/29.
Enter New Longs: On Monday the model indicator added CVS (Baa3/BBB) CVS 5 9/15/32 as a new issue long trade.
Enter New Short trades: Last week the trading model 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.
Monda Basket Trade long/ short ratio 64%
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
On Tuesday the Barclays (Baa1/BBB) BACR Float 11/11/29 reached its avoid trading level
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 12, 2025)
Total Trades: 144 (1% of total trades).
Performance Summary:
Long Indicators: 102/113 reached avoid-trading levels, tightening by -9.41 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 10 tightened by -5.35 bp.
Remaining Shorts: 5 tightened by -16.3 bp.
Average Spread Movement: ±7.50 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.