Systematic Credit and Equity G-255 Trading Indicators for August 15, 2025
Good morning! The US Producer Price Index (PPI) for July rose 0.9% from June, with services costs up 1.1% and goods prices (excluding food and energy) increasing 0.4%. As noted, most major global corporate debt issuers have opted not to pass trade tariff cost increases onto consumers due to market conditions. The July PPI data, alongside approximately 190 earnings reports, accurately reflects inflation and tariff market dynamics. However, as mentioned yesterday, even a +0.1% rise in August CPI inflation is unlikely to alter the Federal Reserve's decision to cut rates in September. Our quantitative trading model does not incorporate "speculative trades" based on market indicators. That said, recent indicators for perpetual bonds and the TransDigm new issue suggest the lower tier of the corporate bond market is attractively priced with sufficient demand.
Year-to-date, 10-year US Treasury (UST) rates are 30 basis points lower, indicating markets are not "discounting" a September rate cut but rather the current demand for USTs with maturities of 5 years or more. The cash US government bond market is reflecting tomorrow's and potentially Monday's news. This is supported by the cash US 10-year note's movement over the past two trading days, trading at the same level as Friday, August 8. A ±15-tick fluctuation occurred following the release of US CPI and PPI data. As for September 17? The cash market is not yet pricing in any specific outcome.
The PPI data shares the same quantitative limitations as CPI data: it is "seasonally adjusted," its components are not well understood, and weightings are historic rather than concurrent.
The Trump Trade and "Buy the dips" remains quantitatively supported:
Thursday's earnings report from John Deere (DE A1/A, attractive short) is detailed on page 6. We highlight DE's credit and equity to explain why market pundits may predict a "crash," "pullback," spread widening, or high-yield pullback. At the same time, Equity valuations, per data agencies, are not excessively high. Additionally, cash inflows into corporate debt have driven systematic trading indicators to signal higher high-yield (HY) prices and tighter credit spreads for at least the next couple of weeks.
US equities are at all-time highs, with FactSet and YCharts reporting upside earnings surprises well above 5-year averages and the S&P 500 trading at ~23x forward Price/Earnings. We accept this data as provided. Our equity indicator, covering the 255 largest debt issuers (180 US-based), indicates that only 66% of underlying issuer equity is overvalued relative to its 200-day trading average.
What drives the "Trump trade," and what is the "secret sauce" behind YCharts and FactSet's data?
The DE equity and debt show attractive short trading model indicators. When Deere reports 4Q results in November, they are expected to reflect a 28% year-over-year earnings decline, a 15% drop in operating cash flow, and the lowest sales in five years. The outlook for fiscal 2026 is marginally better, with "recovery revenue" projected to rise 5% above 2022 (post-COVID) levels, but earnings per share will remain below fiscal 2022 figures.
Markets appear to overlook Deere's revenue declines for eight consecutive quarters. While US trade tariffs contribute to this trend, they are not the primary cause. Rising maintenance and replacement part costs for Deere machinery have driven material unit sales declines across all divisions since early 2023, as we noted in 2023.
Deere Credit Metrics and equity/debt valuation.
Deere's net debt has surged 45% over the past five years to $58 billion, growing at over 10% annually. Yet, DE equity is up 30% year-over-year and 13% year-to-date, trading at 25x forward earnings, with its 10-year credit at 52-week tight spreads.
Single A Industrial Corporate Credit
Of the 18 single-A-rated industrial G-255 issuers, 12 are US corporations generating over $1 trillion in annual revenue. Sector net debt exceeds $400 billion (excluding Berkshire Hathaway), growing at over 13% annually. Of 341 USD single-A industrial bonds from 17 issuers, 222 trade within 10% of their 52-week tight spread, with only three issuers reducing debt.
Operating metrics
Cash flow is declining at 8 of the 12 US issuers, which also have short equity trading indicators. Nonetheless, their bonds continue to tighten, and equities trade higher.
June–July quarter revenue for these issuers was just over $240 billion, down 3% year-over-year. Operating earnings fell 11%, while operating cash flow rose 8%. The sector trades at 23x earnings, with no revenue or earnings growth, and 10 of the 12 equities trade more than 14% above their 200-day moving average.
BBB Industrials Overvalued / Short trading indicators are falling while the rest of the market valuation indicators are rising
Three weeks ago, we discussed BBB-rated industrial issuers (11 total, three deleveraging), with ~$900 billion in annual revenue and $215 billion in net debt. There are 210 USD BBB industrial secondary bonds with $198 billion in market capitalization. Since then, overvalued and short trade indicators for BBB industrials dropped 32% to 39, prompting our model to reclassify the sector as "modestly overvalued" on Thursday.
The Trump Trade?
There remains over $7 trillion in cash on the investment sidelines. At the top of bull markets all news is interpreted as "good new" and a reason to deploy cash. The inflow reading from the ETF and Mutual fund managers are an indication of "marginal demand" for investment securities. As long as those indicators remain positive. The likely outcome of higher equity prices and higher credit valuation exceeds 85% regardless of valuation, reported earnings, cash flow or any other publicly available information for any issuer of equity or corporate debt.
Are reported earnings really showing more than average "upside surprises?" A: It depends which earnings you are viewing.
Are US equities trading in the middle of "normal valuations?" A: It depends which equities you are looking at and how you calculate valuation for a group of issuers.
In the Trump Trade only cash on the sideline and how it is introduced to the risk markets creates a statistically significant directional market indicator for equities, IG or HY debt.
While we are 10% from extreme overvaluation in both high-yield and investment-grade bonds, our trading model suggests credit is not yet poised to widen or decline.
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 ±7.55 bp per trade.
Recent Activity: Between June 30 and August 14, 2025, 25 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 Thursday.
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
Initial Jobless Claims for the week ended August 8 fell -4k when compared to the week ended August 9, 2024. The 4 week average of 221,750 claims is 14,750 lower than in the same week of 2024.
The US producer price index for July increased 0.9% from June, with services costs increasing 1.1% and goods prices excluding food and energy rising 0.4%.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -17% below average
-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 92% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -16% below average
-G-255 Issuers: 13 of the top 25 traded bonds accounted for 59% of top 25 issuer volume and 45% of total TRACE volume.
Market Movement
U.S. CDX Index: +.5bp @ 50bp
U.S. IG Cash Spreads: were (-1 to -2bp) tighter with Single A finance credit outperforming.
CDX HY Index: unchanged @ 107.5 (per Bloomberg).
HY Cash Bonds: TMT HY debt was slightly lower, the remainder of the HY sector was unchanged.
High-Yield Activity
- Dealers bought $300mm of HY bonds Thursday.
Most Bought HY Bonds
- CCO Holdings (CCO B1/BB- attractive long)
Most Sold HY Bonds
- TransDigm (TDG B3/B-, attractive short)
Investment-Grade Activity
- Dealers sold $300mm of IG bonds Thursday.
Most Bought Sector: Big 6 banks
- JP Morgan (JPM A1/A attractive short )
- Bank of America (BAC A1/A attractive short)
Most Sold Sector: BBB TMT
- Verizon Communications (Verizon VZ Baa1/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 146 bonds ($219.3 billion) are considered undervalued by the stochastic credit trading model, with 55 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1509 bonds ($1.74 trillion) are considered overvalued by the stochastic credit trading model with 1012
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $737.7 billion in overvalued market capital across 294 bonds, with 194 short indicators.
Single A Industrials: $118.2 billion, in overvalued market capital across 104 bonds, with 80 short indicators.
Single A and BB Energy $178.9 billion in overvalued market capital across 107 bonds, with 79 short indicators.
Single A Consumer $111 billion in overvalued market capital across 94 bonds, with 68 short indicators.
Issuer News
Intel (INTC BBB/Baa2 attractive short both debt and equity) rose 7 % Thursday after reports that the Trump administration had discussed an unusual move to acquire an ownership stake as part of a plan to revive the troubled US chipmaker.
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 unchanged YoY and wider YTD.
UST 10Y rates are +36.4 bp higher YoY and -29.2bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlated for a third straight trading day and the 136th in 158 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.
New Supply, Bond Maturities, and Credit Fund Inflows for August
No new supply from any G-255 issuers on Thursday, but one new G-255 issue (HY) that we put out model indicators for on Monday, priced on Wednesday night. The TransDigm (TDG B3/B-) 10nc3 unsecured note ($2 bil) was very generously priced @ 6.75%.
US fund flows for the week ended Aug. 13, compared to a week earlier, according to LSEG Lipper:
Short and intermediate investment-grade bonds: $2.51b inflow vs. $3.59b inflow
July's monthly inflow of $28.1b is the highest since April 2021
High-yield notes: $137.9m inflow vs. $1.64b inflow
Treasuries: $2.71b inflow vs. $157.7m inflow
US leveraged loans: $329.1m inflow vs. $470.1m inflow
Mortgage-related: $85m inflow vs. $99.9m outflow
Net inflows to ETFs totaled $12.6b in the week ended Aug. 12, 2025, including the effect of leveraged funds, compared with $9.22b the prior week
This is the 22nd out of 28 weeks in 2025 where both corporate bond ETFs and mutual funds had inflow.
Systematic Trading Model Indicators and Strategy
Model Output
1011 Attractive short indicators . 4 more than Thursday and 85% above the 200 day moving average.
55 attractive long indicators: +1 from Thursday and still 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 70% long position hurdle as attained, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
24 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 14, 2025
Closed Positions: Tuesday the long/ short basket trade exited the Barclays (Baa1/BBB-) BACR FRN 11/11/29. Wednesday the long/ short basket trade exited the CVS (Baa3/BBB) CVS 5 09/15/32. On Thursday the trading model exited the Daimler Truck (A1/A) DTRGR 5 10/12/32, Citigroup (Ba1/BB+) C 6 7/8 PERP and Barclays Baa1/BBB) BACR 4.476 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.
Friday Basket Trade long/ short ratio 50%
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 Thursday the Daimler Truck (A1/A) DTRGR 5 10/12/32, Citigroup (Ba1/BB+) C 6 7/8 PERP and Barclays Baa1/BBB) BACR 4.476 11/11/29 reached their avoid trading levels
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 14, 2025)
Total Trades: 144 (1% of total trades).
Performance Summary:
Long Indicators: 104/113 reached avoid-trading levels, tightening by -9.40 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 8 tightened by -8.16 bp.
Remaining Shorts: 5 tightened by -18.14 bp.
Average Spread Movement: ±7.64 bp in the indicated direction.
Success Rate: 93% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.7 trading days) normal.
August 13 earnings report:
Deere & Company (A1 / A, attractive short) Earnings Summary:
Deere 3Q revenue that fell -9% and operating income that dropped – 32% YoY.
• 3Q Agriculture net sales fell -16% worldwide YoY.
• 3Q Small agriculture revenue fell -1% YoYl.
• 3Q Construction and Forestry revenue fell – 5% YoY
• Company guidance for F2025 is for Deere's 4Q results to have similar declines to those experienced in the first 3 quarters of F2025.
Financial Position:
• 2025 operating cashflow fell -14% in the first 3 quarters of 2025.
• Company was free cashflow positive before returns to shareholders in the first 9 months of F2025.
• After Capex, dividend and share repurchase of $2.9bil in the CSCO 4Q, net debt was flat in 3Q 2025 and rise $7 bil YoY to $58 billion.
Trading Model Indicator: Deere has 48 secondary USD bonds with market cap of $42.2 billion. 25 DE bonds have a market cap of $750mm or greater. Of those bonds with market capital greater than $750mm 3 have overvalued trading indicators and 9 have short trade indicators. The systematic trading model indicator for the DE 5.45 01/16/35 has the greatest credit spread widening.
Equity Indicator: DE equity is an attractive attractive short trade at $511.33 per share.
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.