Systematic Credit and Equity G-250 Trading Indicators for June 26, 2025
Market Balance: Long / Short signals through time
US equities showed mixed performance (NASDAQ up, Dow down, S&P flat), while USD credit widened in investment grade and remained steady in high yield. Notably, dealers purchased over $7 billion in credit over the past three trading days, with three days remaining in the quarter.
As anticipated, the US Federal Reserve proposed reducing bank capital requirements, alongside Bloomberg reports of President Trump considering potential Fed Chair candidates as early as October. Further details are provided below.
We saw net overseas buying for the first time in weeks focused almost entirely on large-cap G-255 issuers in USD, following the Middle East ceasefire and Fed Chair Powell's Tuesday remarks emphasizing patience in rate decisions. Additionally, a significant headline from Mars (MARS) emerged, with Shell (RDSALN) denying interest in bidding for BP (BPLN).
The systematic trading model generated 33 fewer attractive short trading recommendations on Thursday, with valuation metrics indicating US credit is fairly valued heading into Q2 earnings. Page 6 highlights that 55% of issuers are increasing balance sheet leverage, with the world's largest issuers adding debt and raising dividends faster than revenue growth. Questions about the sustainability of this trend will be addressed tomorrow.
Jefferies (JEF, Baa2/BBB) reported disappointing Q2 results. As a non-G-255 issuer, its weaker investment banking performance drew attention. It's unclear how much global banking has improved in June, but global bank earnings estimates (representing 57% of issuance and 60% of TRACE trading) are not rising ahead of Q2 earnings.
Consistent with earlier reports from Michael's Stores (private equity, MIK bonds CCC-rated), Carnival Cruise Lines (CCL, B1/BB, attractive long), and Federal Express (FDX, Baa2/BBB+, attractive short), US growth has slowed since tariff-related trade issues emerged. No significant balance sheet improvements have been reported since the "official" end of earnings season post-Memorial Day.
Initial economic impacts of trade tariffs and their delayed implementation are evident:
US home sales dropped 13.7% YoY in May, the largest decline in 33 months.
The CoreLogic Home Price Index fell from 7% YoY growth at Q1 2024 to 3.4% in May 2025.
Rail carloadings show single-digit YoY declines in intermodal traffic due to US trade tariffs, raising questions about their GDP impact relative to declining imports.
Federal Reserve Updates
The Federal Reserve proposed adjustments to the enhanced supplementary leverage ratio, reducing capital requirements for large banks to 3.5%–4.5% for holding companies and banking subsidiaries (down from 5% and 6%, respectively). This would enable banks to hold more Treasuries and facilitate intermediation in the $29 trillion market.
This aligns with our prior discussions. A capital requirement change before a new Fed Chair appointment? Our approach remains quantitative, focusing on the supply/demand dynamics in US debt capital markets.
Reports suggest President Trump may name a new Fed Chair by September or October, signaling potential earlier interest-rate cuts. Fed Fund futures now project 66 basis points of easing by year-end, with the dollar gauge down over 8% in 2025, reaching a three-year low.
Trading Strategy and Balance Sheet Analysis
Q1 balance sheet analysis of global banks (U.S. Big 6, regional, Canadian, European, French, UK, and single-A/BBB-rated TMT) supports our trading indicators. Japanese banks show particularly strong balance sheets. Trading model outputs continue to indicate:
Long Yankee Banks / Short U.S. Money Center Banks
Long single-A TMT / Short single-A Healthcare
We review sector operating metrics and balance sheets on non-earnings days. Of 123 Systematic long/short trades (marked to market by TRACE prints), 80% achieved their ±6.89 basis point target (page 4).
Portfolio Trading Model Opportunities
Of over 6,000 bonds tracked, 506 are trading near 52-week tight or wide spread levels, consistent with historical averages. The systematic trading model refrained from adding short positions this morning, as one additional systematic long trade in our long/short basket (listed on page 4) hit its avoid-trading threshold on Wednesday. With two fewer long trades, the model adjusted to:
62% long / 18% short strategy
20% front-end allocation, with 67% in floating-rate notes (FRNs) maturing within three years, targeting undervalued, deleveraging bonds
Attractive short opportunities are above 2-year averages.
Key Trading Issues Wednesday
Two additional G-250 USD new supply issues, totaling $6 billion, emerged. Dealers purchased $2.5 billion of high-yield and investment-grade debt as the quarter-end approaches. The proposed change in capital rules may be influencing corporate bond purchases by dealers. On Wednesday, significant overseas net buying of G-250 US debt was observed.
Wednesday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading
- Volume: 14% above average.
- G-250 Issuers: Represented 97 of the top 100 traded issuer bonds, accounting for 94% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
- Volume: 9% below average.
- G-255 Issuers: Represented 18 of the top 25 traded bonds, accounting for 70% of top 25 issuer volume and 59% of total TRACE volume.
Market Movement
- U.S. CDX Index: widened (+.5bp) Wednesday @ 53.5 bp.
- U.S. IG Cash Spreads: were (+2 to +4bp) wider and are now wider over the past 6 days. TMT outperformed while Energy lagged for a third consecutive day and Utilities underperformed for second day in three..
- CDX HY Index: unchanged @ 106.5, per Bloomberg). Sorry about the error yesterday.
- HY Cash Bonds: BB Energy and Auto bonds were the best performing bonds. Consumer bonds underperformed.
High-Yield Activity
- Dealers bought $1.4 billion of HY bonds on Wednesday. That is the 7th day in 10 that dealers have been hit on "Junk" paper.
Most Bought HY Bonds by End Users
- CSL Capital (UNITI, Caa2/CCC)
Most Sold HY Bonds by End Users
- Transdigm (TDG, Ba3/BB- attractive short).
- Fortress Transportation (FTAI Ba2/B+).
Investment-Grade Activity
- Dealers net bought $2 billion+ of IG bonds on Wednesday and are at $6+ billion on the week.
Most Bought End-User Bonds
- EOG Resources (EOG, A3/A-) new issue.
- Broadcom (AVGO Baa2/BBB+ attractive long)
Most Sold Issuer Bonds
- Wells Fargo (WFC A2/BBB+, attractive short)
- Abbvie (ABBV A3/A- attractive short)
- HSBC holdings (HSBC A2/A-, attractive long)
Inflation, Economic Data, and Interest Rates
For the week ended June 21 US weekly rail traffic was 487,328 carloads and intermodal units, up 0.4% compared with the same week last year.
Total carloads were 229,655, up 4.5%, while U.S. weekly intermodal volume was 257,673 containers and trailers, down (-2.9%) YOY.
US weekly rail traffic totaled 487,328 carloads and intermodal units, a 0.4% increase compared to the same week last year.
Attractive Trading Sectors
Long Opportunities
-None identified. However, 210 bonds ($303.5 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): $674.8 billion in overvalued market capital across 267 bonds, with 78 short indicators.
BBB TMT: $200.4 billion in overvalued market capital across 119 bonds, with 24 short indicators.
Single A Healthcare: $135.9 billion in overvalued market capital across 88 bonds, with 21 short indicators.
Issuer News
Jefferies Financial Group (JEF, Baa2/BBB): Q2 earnings fell due to weaker performance in investment banking and capital markets. Revenue declined 1.3% to $1.63 billion, with significant drops in equity underwriting and debt capital markets.
Mars Inc. (MARS, A2/A, attractive short): Its $36 billion bid for Kellanova is under scrutiny as the European Union launched an in-depth investigation to evaluate the deal's impact on consumer product prices.
Shell Plc (RDSALN, A2/A, attractive long): Denied a Wall Street Journal report claiming active discussions to acquire BP Plc, with a spokesperson stating, "This is further market speculation. No talks are taking place."
BP (BPLN, A1/A-, attractive short): Shares surged up to 10% in New York on Wednesday following reports of early-stage takeover talks with Shell.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 45% of the widening observed from November 12, 2024, to April 10, 2025. However, US credit spreads are now wider over the past 7 trading days.
Valuation: U.S. credit is currently fairly valued.
Global Equity Correlation to IG Credit Spreads
Back to the 85% confidence level of correlation between US equity price and US credit spread movement on Wednesday. US equities now re – establishing better risk/reward returns than credit owing to increased cash returns on US equities financed by the corporate debt market.
New Supply, Bond Maturities, and Credit Fund Inflows for June
Wednesday was second consecutive active G-255 USD issuance day. Caixa Bank (Baa2, BBB) sold $ 3 billion of 4nc3/6nc5/11nc10 supply. Honda (HNDA. A3/A-) sold $3 billion of 3Y/5Y/10Y supply. All 6 deals were attractively priced according to the systematic credit trading model.
No other G-250 issuer sold bonds in Europe on Wednesday. G-250 June new supply remains (-23%) below June 2024 levels on a combined (USD + Euro currencies) basis.
Mizuho (A1/A attractive long) announced 6nc5 (fixed and frn) and 11nc10 USD bond offerings overnight.
Systematic Trading Model Indicators and Strategy
Model Output
441 attractive short indicators: 33 fewer than Wednesday with Single A Big Six banks the only sector showing more than 4 fewer attractive short indicators when compared to Tuesday.
65 attractive long indicators: Flat with Tuesday. The (+3 to +6bp) credit spread widening in the past 7 trading days has led to a doubling of attractive long trading opportunities from our trading model. However, attractive longs are still (-47%) below the 200 day moving average. This is more due to re-levering balance sheets than current valuation.
Weekly Trading Strategy (Ending June 26) 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 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.
Most Recent Systematic long/short trades
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.
Yesterday's Caixa ( Baa2/BBB) CABKSM 4.885 7/3/31 new issue is the next published attractive long systematic long /short basket trade.
The Goldman Sachs (A2/BBB+) GS 3.436 02/24/43 is the next published attractive short in the systematic long/short basket trade.
The (US Bank, A3/A) USB 5.424 02/12/36 traded @ its 2025 tight model on Wednesday and reached its avoid trading level according to our model.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – June 25, 2025)
Total Trades: 123 (1% of total indicators).
Performance Summary:
Long Indicators: 73/93 reached avoid-trading levels, tightening by -9.86 bp.
Short Indicators: 26/30 reached avoid-trading levels, widening by +5.44 bp.
Remaining Longs: 20 widened by -0.65 bp.
Remaining Shorts: 4 tightened by -6 bp.
Average Spread Movement: ±6.61 bp in the indicated direction.
Success Rate: 80% of indicators reached avoid-trading levels (10% below normal).
Notes:
Initial long trades based on TRACE print (or new issue price) at indicator date.
Avoid indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
21 long trades hit avoid-trading levels, contributing -1.51 bp to overall spread tightening for the 73 long trades.
2 short trades hit avoid trading level (+5 from model indicator level)
Overall performance improved from ±4.91 bp to ±6.61 bp across 123 systematic long/short trades.
Earnings Season Insights
For issuers like Kroger (KR, Baa2/BBB, attractive long), Carnival Cruise Lines (CCL, B1/BB, attractive long), and Federal Express (FDX, Baa2/BBB+, attractive short), we observe that 60% of 177 global non-financial issuers reporting interim results from April 14 through yesterday increased net debt. Revenue growth for these issuers, including NVIDIA and other tech firms, was 4.32% in the latest quarter, while dividend payouts and share repurchases rose by 10%.
When including financial issuers, 240 of the world's top 255 corporate borrowers added $140 billion in net debt quarter-over-quarter and $1.27 trillion year-over-year. As previously noted, the majority of global corporate liquidity is concentrated in Japanese, French, and UK banks.
Regarding personal liquidity, the majority of the $11 trillion in personal liquidity resides in US money market accounts.
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.