Systematic Credit and Equity G-255 Trading Indicators for August 18, 2025
Good morning! We have covered in the past topics like Ukraine, tariffs, and the timeline for political decisions to translate into capital allocation. Key quantitative insights include: (1) NATO countries and their corporations contribute 35% to US GDP. (2) For global corporations to allocate capital effectively, market information must be precise, and approaches to each market require certainty. Regarding these issues, we're still in the fourth inning of a nine-inning game. The full impact of US White House foreign policy, including trade, is months—if not years—away from affecting economic and earnings data.
Turning to corporate earnings and risk valuation for the 255 largest corporate debt issuers, our systematic credit trading model is nearing an inflection point, signaling that corporate credit and underlying equities are approaching "extremely overvalued" territory. For corporate credit, our model employs a straightforward equation: when the number of eligible "attractive short" trading indicators exceeds 18.5% of the 6,000 bonds in our trading universe, there's a 95% probability that credit prices will decline and spreads will widen over the next 44 trading days. We're currently just 10 "attractive short" indicators away from this threshold.
For credit spreads to widen and high-yield (HY) prices to fall, the model relies on three additional data hierarchies: (1) Balance sheet leverage, (2) Retail credit fund flows, and (3) Equity price depreciation. These are included in our daily reports. While balance sheet debt for the 255 largest bond issuers continues to grow and 2–7-year bond spreads are at historic tights, credit fund flows remain robustly positive, and global equity prices continue to climb.
How to Prepare for the Impending Spread Widening and HY Price Decline
Sector Selection
a. For long/short: Identify sectors to short.
b. For long-only: Identify sectors to underweight.
Issuer Selection
a. For both long/short and long-only: Target issuers in sectors with the highest leverage and the most "attractive short" indicators.
Individual Security Selection
a. For both long/short and long-only: Focus on the most liquid bond trading at the tightest or highest levels relative to its model "attractive short" threshold.
Over the past six trading days, we've provided five sector overviews. While we previously highlighted overvalued/undervalued trading indicators, as overall credit valuation nears its peak, we'll now present the best examples of sector selection and model trading outputs.
USD Financials
Financial institutions, particularly banks, account for a significant share of global corporate bonds, representing ~53% of outstanding corporate bonds. Within our G-255 universe, financials make up less than 31% of the 6,000 bonds and 36% of the market cap, indicating lower weight among the world's largest issuers.
European Banks
We've frequently noted that UK/European banks hold over twice as many loans and deposits as the top 23 US financial issuers. In the USD market, US bank bonds total 772 ($1.33 trillion), comprising 44% of all financial USD bonds and 56% of USD financial market cap.
Where Is the Re-levering in Europe? Nordic Banks See the attached Earnings Digest for details.
G-255 Nordic Bank Operating metrics (in USD) 2Q 2025 (4 attractive short / 2 attractive long)
Nordic Banks have approximately half the loans of the 13 regional US banks, with declining credit quality.
Nordic Banks hold ~400 basis points more CET1 capital than US regional banks.
G-255 Nordic Bank Balance Sheet metrics (in USD) 2Q 2025
Nordic Banks return over 50% of net profit to shareholders via share repurchases and dividends.
Nordic Bank Net debt rose 16% YoY, while revenue declined 3.4% YoY.
Re-levering in the large European banking sector is concentrated in Nordic Banks, making them the primary short opportunity in the USD European banking sector.
Trading Indicators (See Attached Earnings Digest)
Of the 50 liquid USD bonds from six Nordic banks (40 from four re-levering issuers), 10 carry an "attractive short" indicator, and five are "significantly overvalued" (25% short indicator).
a. For long/short trading: Four trading examples are provided in the Nordic Bank Earnings Digest.
b. For long-only trading: Avoid this segment of the European banking sector.
Five of the six Nordic Bank equity indicators have reached "Avoid" or "Short" levels.
Systematic Trading Model:
This morning's model indicators suggest credit will continue to tighten or rise in the near term.
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% achieved ±5 bp targets, averaging ±7.64 bp per trade. Between June 30 and August 14, 2025, 25 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Last week saw strong inflows into US corporate bond ETFs and mutual funds for investment-grade bonds.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, complying with global regulatory requirements for material events.
Inflation, Economic Data, and Interest Rates
July retail sales rose 0.5% MoM; June revised to +0.9% from +0.6%.
University of Michigan sentiment for August fell to 58.6 from 61.7 in July.
Current economic conditions index dropped to 60.9 from 68.0.
Expected median price changes: 4.9% (next year, up from 4.5%), 3.9% (next 5–10 years, up from 3.4%).
New York Empire Manufacturing Index rose to 11.9 in August from 5.5 in July.
Prices paid fell to 54.1 from 56.0.
New orders rose to 15.4 from 2.0.
The next move is still tighter/higher in credit according to this morning's systematic trading model indicators.
Friday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -5% below average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 90% of top 100 issuer volume and 75% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -13% below average
-G-255 Issuers: 13 of the top 25 traded bonds accounted for 56% of top 25 issuer volume and 50% of total TRACE volume.
Market Movement
U.S. CDX Index: unchanged @ 50bp
U.S. IG Cash Spreads: were (-1 to -2bp) tighter with TMT credit outperforming.
CDX HY Index: unchanged @ 107.5 (per Bloomberg).
HY Cash Bonds: BB industrials were the best performing sector and BB energy was lower Friday.
High-Yield Activity
- Dealers bought $300mm of HY bonds Friday.
Most Bought HY Bonds
- Citigroup Perps (C Ba1/BB+ attractive long)
Most Sold HY Bonds
- TransDigm (TDG B3/B-, attractive short)
Investment-Grade Activity
- Dealers sold $1.4 bil of IG bonds Friday.
Most Bought Sector: BBB Consumer
- Kraft Heinz (KHC Baa3/BBB- attractive short )
- JBS Holdings (JBS Baa/BBB-)
Most Sold Sector: BBB Autos
- General Motors (VZ Baa2/BBB attractive short)
- Ford (INTC Ba1/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 147 bonds ($222.7 billion) are considered undervalued by the stochastic credit trading model, with 58 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): $746.7 billion in overvalued market capital across 298 bonds, with 206 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 108 bonds, with 79 short indicators.
Single A Healthcare $171 billion in overvalued market capital across 117 bonds, with 93 short indicators.
Issuer News
None over the weekend
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 48% 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 still wider YTD.
UST 10Y rates are +42.6 bp higher YoY and -26.1bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlate a fourth straight trading day and the 137th in 159 trading days in 2025. 10 year and shorter maturity credit spreads are new record tights while US equities are at record highs. 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
During the month of August 22 G-255 issuers have sold 55 bonds for a total of $43.625 billion. New G-255 USD supply now totals $705 billion and is only 11% behind 2024 Jan – Aug totals. G-255 bond maturities (and called bonds) reached $31 billion for the month August over the weekend.
We have seen 22 out of 28 weeks in 2025 where both corporate bond ETFs and mutual funds had inflow.
Systematic Trading Model Indicators and Strategy
Model Output
1095 Attractive short indicators . 83 more than Friday and withing 5 of changing the systematic trading overall credit indicator to "significantly overvalued."
58 attractive long indicators: +3 from Friday 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 18, 2025
Closed Positions: ln thepast week ong/ short basket trade exited the Barclays (Baa1/BBB-) BACR FRN 11/11/29, exited the CVS (Baa3/BBB) CVS 5 09/15/32, 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: Last week the model indicator added CVS (Baa3/BBB) CVS 5 9/15/32 as a new issue long trade.
Enter New Short trades: The trading model indicators show adding at least 3 new issue trades prior to adding any short trades.
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 44%
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
No new trading indicators Friday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 15, 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 recommended direction.
Success Rate: 93% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.7 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.