Systematic Credit and Equity G-250 Trading Indicators for June 18, 2025
Systematic credit trading overview and model indicators
Good morning. We had a third trading day in 6 where US credit outperformed US equities while the two risk markets continue to directionally correlate on 86% of 2025 trading days, the disparity between performance of stocks and corporate bonds has narrowed somewhat in the past 3 ½ weeks.
With Middle East tensions and the press' unrelenting desire to incorporate Trump ultimatums the markets continue to take a wait and see approach to trading global risk. If what is the largest difference today in terms of trading risk when Iran/Israel type tensions arise today versus 15 years ago? Take a look at Aramco equity (ARAMCO AB) and Aramaco corporate debt. While only the debt trades in USD, the desire of Middle Eastern Corporates is to own Western asset primarily assets that are publicly traded. Simply put, the Iran/Israel conflict is "bad for business." The ramifications from that statement are obvious.
And with the movement in USTs and the financial press obsession with Trump, there were numerous headlines maintaining the large interest rate 2026 futures based on the end of Fed Chair Powell's regime in 12 months, the constant discussion of US interest rates comes full circle to today's Fed meeting. Whether the Fed is going to cut rates in September will not be answered at today's meeting. We are now in the second inning of the "impact of…" whether it be trade tariffs, new immigration or foreign investment in the US, none of that gets resolved in the next 8 weeks. But that is not going to stop the markets from speculating about the possible outcomes.
As to trading strategy, we have reviewed 1Q balance sheet information for global banks, US Big 6 banks, Regional Banks, Canadian Banks, European Banks, French Banks, UK Banks and both Single A and BBB TMT. Today we provide a review of the Australian banks and the basis for over 40 attractive short indicators. Over the remainder of the earnings "off season," we will provide the underlying balance sheet leverage information that has leads to Systematic corporate bond trading indicators. As noted on page 4, of the 119 published indicators (and marked to market by trace prints) 81% of those long and short indicators reached their +/- 7bp per trade indicators avoid trading point.
Systematic Credit Model Portfolio Trading Strategy – Wednesday, June 18, 2025
Of the 6,000+ bonds in our research universe, 499 are trading near their 52-week tight or wide spread levels, which is slightly higher than historical averages. Despite Tuesday's modest credit spread tightening, our trading model continues to indicate:
65% long/short positioning strategy.
35% allocated to front-end indicators, with 70% in floating-rate notes (FRNs) maturing in three years or less, targeting undervalued, deleveraging bonds.
Attractive short indicators remain moderately elevated, approximately 30% above the long-term average.
The model continues to see TMT and Yankee banks as attractive longs at wider levels (please see page 6 for 1Q Australian Bank Review) and US Banks are attractive shorts at slightly tighter levels.
Key Trading Issues for Tuesday
We had a partial return to normalcy on Tuesday as 3 G–255 issuers came to the USD market and sold 3 deal of $1 bil and two other tranches $750mm. We saw some new issue flipping return to the market and the world's largest issuers of debt (what we call the "G–255") account for 70% of the days trading volume.
Tuesday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading Volume: -19% below average. G-255 Issuers: Accounted for 89 of the top 100 traded bonds, representing 91% of top 100 issuer volume and 69% of total TRACE volume.
High-Yield (HY) Trading Volume: average. G-255 Issuers: Accounted for 16 of the top 25 traded bonds, representing 65% of top 25 issuer volume and 61% of total TRACE volume.
Market Movement
U.S. CDX Index: +2 bp wider at 56.5 bp and near Friday's level.
U.S. IG Cash Spreads: (+1 to +4bp) with Energy (both single A and BBB rated) and financials underperforming.
CDX HY Index: lost (- .5pt) to 106.2 (per Bloomberg).
HY Cash Bonds: Financials (Subs of large banks rated below BBB) and TMT outperformed. US High Yield industrial bonds underperformed.
High-Yield Activity - U.S. dealers purchased roughly $300mm of HY bonds on Tuesday.
Most Bought HY Bonds by end users:
Unisys Corp (UIS), was the most bought bond on Tuesday as the company sold $700mm 10.625% secured bonds on Monday.
Most Sold HY Bonds by end users:
New Beacon Mobility (BEAMOB), 7 ¼ Secured bonds ($550mm secured) new issue on Tuesday were the most sold bonds by end users.
Investment-Grade Activity End users neither net bought or sold IG bonds on Tuesday.
Most Bought End-User Bonds:
Bank of America (BAC, A1/A-, attractive short).
Wells Fargo (WFC, A1/BBB+ attractive short).
Most Sold Issuer Bonds:
EOG resources (EOG, A3/A-) new supply were the most sold bonds by end users on Tuesday.
Inflation, Economic Data, and Interest Rates
Retail sales fell - 0.9% MoM in May
April retail sales revised to -0.1% from 0.1%
Retail sales less autos fell 0.3% m/m in May
Same-store sales, rose 5.2% in the June 14 week compared to a year earlier according to Johnson Redbook.
Month-to-date sales through June 14 rose 5.0%
US factory production declined -0.4% in April, the first decrease in six months.
The survey saw declines in motor vehicles, computers, and apparel.
Capacity utilization at factories fell to 76.8%
UST 10Y rates are (-17bp) lower YTD @ 4.40%
Attractive Trading Sectors
Long Opportunities
None: 151 bonds ($133.2 billion) are undervalued, with 32 attractive long indicators by the trading model.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $666 billion in overvalued market capital across 261 bonds, with 51 short indicators.
Energy (All Ratings): $202 billion in overvalued market capital across 140 bonds, with 82 short indicators.
BBB TMT: $202 billion in overvalued market capital across 118 bonds, with 41 short indicators.
Single A Healthcare: $140.5 billion in overvalued market capital across 99 bonds, with 36 short indicators.
Issuer News
US Big 6, Most Yankee Banks US bank regulators plan to reduce the enhanced supplementary leverage ratio (eSLR) by up to 1.5 percentage points for the biggest lenders, which could lower their capital requirements.
The proposal would change the overall ratio rather than exclude specific assets like Treasuries.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 50% of the widening observed from November 12, 2024, to April 10, 2025. US credit spreads are roughly back to Friday's levels and (-10bp) MoM/
Valuation: U.S. credit is currently overvalued but remains well below the midpoint of the overvalued to most overvalued range.
Global Equity Correlation to IG Credit Spreads
Monday marked the 34th of 38 trading days when US credit followed US equity prices. The performance disparity between the 2 markets continues to narrow minimally. The S&P 500 is up 1.25% MoM while the DJIA is slightly lower. US credit spreads are at least (-10bp) over the the same time period.
New Supply, Bond Maturities, and Credit Fund Inflows for June
Three new G-255 issuers on Tuesday with United Healthcare (UNH, A2/A+) sold new debt for the first time in 2025 selling 4 new trades with one $1 billion bond. The 2 front end (3Y and 5Y bonds) were priced attractively . Enterprise Products (EPD, A3/A-) sold the most attractive bonds on Tuesday, however, none of the 3 trades exceeded $750mm in market capital. Hyundai Capital of America (A3/A-) sold $3.5 of the $8.5 billion of new USD G -255 sold Tuesday and the new 5Y transaction was the most attractive of the 5 bonds sold. Hyundai is the only one of the 3 issuers (all rated single A) that is reducing debt as of 30 March 2025.
Thus far in June 2025 16 G-255 issuers have sold 41 bonds totalling $31.2 billion with 61% of the supply coming from non – financial issuers. This is a more than (-20%) decline for the month of June YOY for G-255 USD supply.
G-255 issuers Unicredit (UCGIM, Ba1/BBB-) sold 12nc7 Tier 2, and Macquarie Bank (MQGAU, Aa2/A+) sold 2Y FRN in Europe on Tuesday
Systematic Trading Model Indicators and Strategy
Model Output
467 attractive short indicators: 95 fewer than Tuesday, and 8% above average, leaving the IG credit market modestly overvalued. No industry sector counted for than 19 attractive short indicator changes.
32 attractive long indicators: an increase of 3 attractive long indicators from Tuesday.
Weekly Trading Strategy (Ending June 20)
Model output unchanged until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Avoid adding short positions until attractive short indicators exceed 400 and weekly fund inflows fall below $1.5 billion.
Systematic Portfolio Trading Model Indicators: Short one bond for each bond added long.
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 twi of 10 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
The model adds the new Hyundai USA credit, A3/A HYNMTR) 5.1 06/24/30 new issue as an attractive long. HYNMTR was the only issuer selling bonds Tuesday that is de-levering.
The model adds the Oracle (ORCL, Baa2/BBB) 2.95 4/1/30 as an attractive short @ 69/5Y
Sample Trade Performance Report (January 4, 2025 – June 17, 2025)
Total Trades: 119 (1% of total indicators).
Performance Summary:
Long Indicators: 70/90 reached avoid-trading levels, tightening by -9.96 bp.
Short Indicators: 25/29 reached avoid-trading levels, widening by +5.25 bp.
Remaining Longs: 10 widened by +1.52 bp.
Remaining Shorts: 4 tightened by -5 bp.
Average Spread Movement: ±6.97 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 indicators hit avoid trading level (+5 from model indicated level)
Overall performance improved from ±4.91 bp to ±6.63 bp across 119 sample trades.
Earnings Season Insights
Balance Sheet and Earnings Trends
For the past six quarters, the world's 255 largest corporate debt issuers have exhibited expanding balance sheets. Our trading model tracks sector-specific balance sheet and operating earnings trends. In the F 1H of 2025 (ended March 31), Australian banks followed the US bank lead by issuing debt to supplement payouts to shareholders. At the sametime Australian Revenue and earnings growth far exceeded that of most global banks in 1H 2025 as credit quality improved significantly. CET1 capital dropped below 13% while operating margin improved and, liquidity, and balance fell slightly and sheet leverage rose. The Australian balance sheet decline both QoQ and YoY provide the basis for our credit trading model's numerous short indicators for the for OZ bank secondary in May, following Q1 earnings reports.
Note – all results are translated into USD
Key Financial Metrics
Net Income: Increased by $2.6 billion (+45% YoY) and $262 million (+3% QoQ), driven by expanding margins due to lower credit writedowns.
Revenue: Grew by 33% YoY.
Operating Margin: Improved by 500 basis points YoY.
Dividends and Share Repurchases: Rose by $1.26 billion (22.45%) to $6.891 billion in 1H 2025.
Note – all results are translated into USD