Systematic Credit and Equity G-255 Trading Indicators for August 5, 2025
Good morning! We've frequently leaned on inappropriate baseball metaphors, and to stay in the same league, earnings season is now in the seventh inning. Today, we focus on UK banks, as among the eight new USD issues from G-255 corporates on Monday, Barclays—ranked as the most attractive long issuer among the 115 deleveraging or net cash balance sheets in our trading group—issued a $3 billion package, the largest on Monday. This included 4Y non-call 3Y fixed and FRN, and 21Y non-call 20Y, priced slightly aggressively.
While Yankee Banks underperformed the broader IG market on Monday, it's clear that Yankee Financials and US Financials are not playing in the same ballpark regarding revenue growth, dividend payouts, share repurchasing, and balance sheet health.
UK Bank G – 255 issuers (7) 2Q 2025 Sector Operating Metrics
Banking income rose 7.6% YoY – with Santander UK (SANUK) still to report (August 8)
Net interest income rose at 3 of the 5 reporting issuers in 2Q
Operating margin rose 110bp YoY for the group
Credit quality has improved 2bp QoQ and 9bp YoY
UK Bank G – 255 issuers (7) 2Q 2025 Sector Balance Sheet
UK Bank balance sheets remain in a net cash position for 7th straight year.
Overall CET1 capital remains above 14% for a third consecutive year.
Deposits grew 7% YoY
UK banks are managing dividend payments and share repurchase to either reported earnings (%) or CET 1 ratio.
US banks, unlike their UK counterparts, lack net cash positions and exhibit significantly slower revenue growth. The primary driver? Trade tariffs and their disruption of free market economies. Non-US banks face fewer tariff-related challenges in straightforward banking deals compared to US banks.
UK banks hold more capital than US banks and manage dividends and share repurchasing to a higher CET1 capital ratio than their US counterparts.
So, what do the model trading indicators suggest? Go long on deleveraging Yankee bank bonds, short US bank bonds, and long US bank equities at the right price.
Earnings Summary (Week of August 8, 2025):
Of the 255 largest global corporate debt issuers, 66 are reducing leverage, while 83 are increasing net debt. Twenty-six issuers saw balance sheet changes. Sixteen issuers that were deleveraging last quarter are now adding net debt, while ten that were re-levering after Q1 are now deleveraging at Q2's end. One hundred issuers have yet to report for the June–July fiscal period.
Sectors Reducing Debt/Adding Cash: (1) TMT (A and BBB), (2) Non-Nordic European Banks, (3) Global Autos.
Sectors Adding Most Net Debt: (1) A-rated Energy, (2) A-rated Consumer, (3) Big 6 Banks, (4) Aerospace and Defense (A and BBB).
Sectors Most Negatively Impacted by Tariffs: (1) Global Auto, (2) Global Consumer, (3) US Transports, (4) Healthcare, (5) Global Industrials.
Systematic Trading Model:
The model generates daily trading indicators for over 6,000 bonds. Currently, 743 bonds are within 20% of their 52-week tight or wide spread levels, 19% above historical averages.
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 135 long/short trades in 2025 (marked via TRACE), 93% hit ±5 bp targets, averaging ±7.47 bp per trade.
Recent Activity: Short position additions paused on July 2, 2025, due to non-replaced long positions from late June to early July. Between June 30 and August 4, 2025, 20 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. There were strong inflows into US Bond ETFs and Mutual Funds last week for IG. HY inflows were mixed
Risk Management:
The model avoids adding risk to G-255 issuers scheduled to report results within 30 days, complying with global regulatory requirements for reporting material events.
Inflation, Economic Data, and Interest Rates
US June Factory Goods Orders Fell - 4.8% MoM. New orders – ex defense fell -4.7% which explains 3Q Aerospace and Defense earnings results. However, it is far too early call this a "trend,"
Monday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -13% Below average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 79% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -9% below average
-G-255 Issuers: 13 of the top 25 traded bonds accounted for 50% of top 25 issuer volume and 49% of total TRACE volume.
Market Movement
U.S. CDX Index: -2bp @ 52 bp
U.S. IG Cash Spreads: Ranged from (+1bp) wider to -2bp tighter. Yankee Financials underperformed.
CDX HY Index: +.4 @ 107 (per Bloomberg)
HY Cash Bonds: BB TMT outperformed Monday.
High-Yield Activity
- Dealers bought $500mm of HY bonds Monday.
Most Bought HY Bonds
- Venture Global Partners (Ba2/BB+ attractive short)
Most Sold HY Bonds
- New Issue L-3 (LVLT B-/B+ attractive long)
Investment-Grade Activity
- Dealers sold $100 mm of IG bonds Monday.
Most Bought Sector: BBB TMT
- Oracle (ORCL, Baa2/BBB attractive short)
- Intel (INTC, Baa2/BBB attractive short)
Most Sold Sector: Yankee banks
- Barclays (BACR, Baa1/BBB+ attractive long)
- UBS (UBS A1/A- attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers, BBB TMT and Euro Yankee Banks Overall model indicators 183 bonds ($264.8 billion) are considered undervalued by the stochastic credit trading model with 72 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1435 bonds ($1.15 trillion) are considered overvalued by the stochastic credit trading model with 671 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $715.6 billion in overvalued market capital across 284 bonds, with 88 short indicators.
Single A and BBB industrials $178.8 billion, in overvalued market capital across 146 bonds, with 91 short indicators.
Single A and BB energy $163.1 billion in overvalued market capital across 97 bonds, with 50 short indicators.
Single A Consumer $105.4 billion in overvalued market capital across 87 bonds, with 40 short indicators
Issuer News
69 earnings results reports in the past 4 trading days.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 46% 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 (140 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 but still materially wider YTD.
UST 10Y rates are +42.2 bp higher YoY and -35.9bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices were directionally correlated in Monday but only slightly. US credit was slightly better in terms on investment grade credit spread and High Yield price. While US equity prices rose 1.5% on average Monday. While credit spread movement has an 80% correlation to the equity price movement, the magnitude of these moves has changes markedly over the past 2 years. This owes to the world's largest corporates using balance sheet to fund equity share repurchase and dividend payout
New Supply, Bond Maturities, and Credit Fund Inflows for August
Monday saw 8 G-255 issuers sell 14 separate trades totaling $12.675 bil of new bonds. Barclays (BACR) Baa1/BBB+ was the only issuer that is not re-levering its balance sheet. 10 of the 14 new deals were seen as attractively priced by our trading model.
The most attractive Monday deals were Public Service of Colorado Public Service Co of Colorado (XEL, A1/A)
$10Y 1st Mortgage Bond IPT + 120 - Model attractive point + 91/10Y and XEL 5.85 05/15/55 TAP IPT+125 Model attractive point + 120/30Y and Fiserv (FI Baa2/BBB) $5Y Fixed IPT + 115 - Model attractive point +81/5Y
$10 Fixed IPT +135 - M del attractive point + 102/10Y.
Systematic Trading Model Indicators and Strategy
Model Output
671 Attractive short indicators . 2 more than Monday.
72 attractive long indicators: Roughly 40% below the 200 day moving average.
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:
19 long trades reached their avoid trading levels in the past 30 days and were replaced by 6 new issue indicators
Systematic Credit Trading Strategy August 5, 2025
Closed Positions: The long/ short basket trading exited the Mecedez Benz (A3/A-) MBBGR FRN 4/1/27 Monday
Enter New Longs: Trading model indicators added as long trades Monday Barclays (Baa1/BBB+) BACR Float 11/11/29 and BACR 4.47 11/11/29
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.
Basket Trade long/short Tuesday 60%
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
Trading model indicators added as long trades Monday: Barclays (Baa1/BBB+) BACR Float 11/11/29 and BACR 4.47 11/11/29
The Mercedez Benz (A3/A-) MBBGR float 4/1/26 reached its avoid trading level on Monday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 4, 2025)
Total Trades: 138 (1% of total trades).
Performance Summary:
Long Indicators: 101/107 reached avoid-trading levels, tightening by -9.42 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 5 tightened by -.67 bp.
Remaining Shorts: 4 tightened by -16.22 bp.
Average Spread Movement: ±7.47 bp in the indicated direction.
Success Rate: 93% 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.