Systematic Credit and Equity G-255 Trading Indicators for August 8, 2025
Good morning! Thursday brought more earnings surprises, mostly positive, from issuers like Eli Lilly (LLY Aa3/A+ attractive short), Softbank (SOFT Ba3/BB- attractive short), Deutsche Telekom (DTE Baa1/BBB+ attractive long), ConocoPhillips (COP A2/A- attractive long), Canadian Natural Resources (CNQCN Baa2/BBB- attractive short), Toyota (TOYOTA A1/A+ attractive long), and Becton Dickinson (BDX Baa2/BBB attractive short). Their operating results and cash flow were robust enough for our systematic trading model to favor trading their equities on the long side.
Of the 184 issuer balance sheets reported, 98 are not attractive per the systematic trading model, but 56 equities are attractive longs at current prices, compared to 42 with attractive short trade indicators. Including ETF and mutual fund flows, our model predicts equities will rise and credit spreads will tighten from here.
So, when does the music stop? The ingredients for that cake are baking:
(1) A slowing economy (see below)
(2) Persistent inflation (see below)
(3) Declining corporate earnings (pre-"adjustments")
(4) A new Fed Chairman on the horizon to top it off.
The "catalyst" will be "adjusted earnings," as risk markets must reconcile whether equities trade at 31x "adjusted earnings" or 45x GAAP earnings, and whether BBB credit trades at 3x "adjusted EBITDA" or 4x real EBITDA. The "experts" are baffled by the heavy bets on "adjusted" numbers.
A sports analogy? Well it is Friday
Ask any Chicago sports fan over 60 for a simpler take. Long before "Da Bears!" and MJ, there were long summers and bitter winters. None was more crushing than the 1971 NHL season's end, when the Blackhawks led 2-0 in the Stanley Cup Finals against Montreal, holding 2-0 leads in both Games 6 and 7, only to lose on a "GAAP" basis. Game 7 was gut-wrenching: Montreal tied it with a 60-foot slapshot over Hall of Famer Tony Esposito's left shoulder, compounded by an errant back pass off the back of the net at the end of second period by Eric Nesterenko. Years later, I discussed those moments with both players, but it took 39 years to heal the childhood trauma of Game 7's second period.
If only we had "adjusted accounting" in 1971, we could've claimed a 2-0 "adjusted score" at the end of the second period, with the Hawks winning "adjusted Game 7" and the "adjusted 1971 Stanley Cup." My childhood would've been happier and more productive.
The point? I wouldn't bet on that game or the Stanley Cup based on adjustments.
Yet, risk markets are all-in on "adjusted" results and guidance from major corporates. Eventually (I don't know when), adjustments, economic slowdown, and a new Fed chair will bake a "market turmoil cake."
Economic Slowdown: It's here.
Weekly rail carload YoY growth fell from 8.6% in late March to 2.9% for the week ending August 1. Intermodal traffic growth dropped from 6.3% to 0.2% over the same period.
Recession Likelihood? Absolutely.
2025 is set for a record 15,000 retail store closures, per Coresight Research.
Chains with Notable Closures:
Macy's: Closing 65 stores.
Walgreens: Closing 2,150 locations from 2025–2027.
Big Lots: Closed 517 stores in 2024 (Fast Company).
7-Eleven: Closing 444 North American stores.
Party City: Shuttering all stores after 40 years.
Advance Auto Parts: Closing 523 corporate-owned stores by end-2026.
CVS: Continuing plan to close 900 stores over 3 years.
Inflation: US used car prices rose +1.55% since April, now +0.66% YoY, the first annual increase in 14 months. While energy prices are down, auto costs keep inflation from nearing 2%.
Earnings Summary (Week of August 8, 2025):
Among the 255 largest global corporate debt issuers, 86 are reducing leverage, while 98 are increasing net debt. Twenty-six issuers saw balance sheet changes. Sixteen previously deleveraging issuers are now adding net debt, while ten re-leveraging after Q1 are now deleveraging at Q2's end. Fifty-eight issuers are yet to report for June–August.
Sectors Reducing Debt/Adding Cash: (1) TMT (A and BBB), (2) Non-Nordic European Banks, (3) Global Autos, (4) BBB Energy.
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.
Refer to the attached earnings digest for systematic trading model equity and debt issuer indicators since July 25. Contact us for individual issuer trading curves with all liquid bonds.
Systematic Trading Model:
The model generates daily indicators for over 6,000 bonds. Currently, 841 bonds ($1.24 trillion) are within 20% of their 52-week tight or wide spread levels, 39% 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 143 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.45 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. We saw strong inflows into US corporate bond ETFs and Mutual Funds for IG last week.
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
We will get CPI data on Friday with little change expected in the numbers.
Weekly Jobless clams fell -8k YoY to 226k in the week ending August 1
The 4 week moving average for initial jobless claims fell -19k to 221k
NY Fed one year inflation expectations rose 7bp in July to 3.09%
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -9% Below average
-G-255 Issuers: 98 of the top 100 traded issuer bonds accounted for 98% of top 100 issuer volume and 78% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -1% below average
-G-255 Issuers: 7 of the top 25 traded bonds accounted for 21% of top 25 issuer volume and 20% of total TRACE volume.
Market Movement
U.S. CDX Index: Unchanged @ 52bp
U.S. IG Cash Spreads: Ranged from (+1bp) wider to (-2bp) tighter. BBB communications and BBB financials outperformed.
CDX HY Index: unchanged @ 107 (per Bloomberg).
HY Cash Bonds: Consumer and Healthcare outperformed Thursday. No trading sector was materially wider.
High-Yield Activity
- Dealers bought $1 bil of HY bonds Thursday.
Most Bought HY Bonds
- Warnermedia (WBD Ba2/BB- attractive long)
Most Sold HY Bonds
- Sabre Global Inc (SABHLD B3/B-)
Investment-Grade Activity
- Dealers bought $2 bil of IG bonds Thursday.
Most Bought Sector: BBB TMT
- Intel (INTC, Baa2/BBB attractive short)
- Broadcom (AVGO, Baa2/BBB attractive long)
Verizon (VZ Baa1/BBB+ attractive long
Most Sold Sector: BBB Healthcare
- HCA (HCA, Baa3/BBB- attractive short)
- Elevance Health (ELV Baa2/A attractive long)
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 178 bonds ($244 billion) are considered undervalued by the stochastic credit trading model with 71 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1466 bonds ($1.32 trillion) are considered overvalued by the stochastic credit trading model with 770
attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $736 billion in overvalued market capital across 294 bonds, with 132 short indicators.
Single A and BBB industrials $157.4 billion, in overvalued market capital across 135 bonds, with 86 short indicators.
Single A and BB energy $151 billion in overvalued market capital across 89 bonds, with 60 short indicators.
Single A Consumer $114 billion in overvalued market capital across 96 bonds, with 54 short indicators.
Issuer News
ConocoPhillips (COP A3/A- attractive long) raised its target for asset sales on its quarterly conference call today to $5 billion by the end of next year, more than doubling the previous forecast.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 55% 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 (138 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 slightly tighter YoY and wider YTD.
UST 10Y rates are +26.2 bp higher YoY and -31.9bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices did not correlate on Thursday. were directionally correlated for the 119th trading day out of a possible 140 Thursday. 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
Just MPLX (MPLX Baa2/BBB) was the long G-255 issuer on Thursday. While MPLX is adding net debt to its balance sheet YoY, Total debt is ostensibly flat QoQ. This bodes well for the short-term trading of this new issue.
The front end MPLX bonds were priced attractively according to our trading model. MTD USD G-255 supply is now over $27 billion and closing in on $700 bil for the year.
LSEG Lipper weekly mutual fund data for the week ended August 6 shows:
Short and intermediate investment-grade bonds: $3.6b inflow vs. $1.34b inflow
High-yield bonds: $1.65b inflow vs. $168.6m outflow
Treasuries: $156.4m inflow vs. $2.43b inflow
US leveraged loans: $470.1m inflow vs. $255m inflow
Mortgage-related: $99.9m outflow vs. $555.1m inflow
This is the 8th week in 11 where both ETF and Mutual fund corporate bond flows were positive.
Systematic Trading Model Indicators and Strategy
Model Output
770 Attractive short indicators . 47 more than Thursday and -171 fewer than a week ago.
71 attractive long indicators: -3 from Thursday
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 8 new issue indicators
Systematic Credit Trading Strategy August 7, 2025
Closed Positions: The long/ short basket trading exited the Mercedez 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, Tuesday: Daimler Truck (A3/A-) DTRGR 10/12/32 Tuesday. On Wednesday added the new BMW (A2/A) BMW 4 1/2 08/11/30 08/11/25.
Enter New Short trades: On Wednesday 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.
Thursday Basket Trade long/ short ratio 66%
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: On Wednesday, added BMW (A2/A) BMW 4 1/2 08/11/30 as an attractive new issue indicator.
Trading model indicators added as short trades: On Wednesday, added Truist Bank subordinated (A3/A-) TFC 2 1/4 03/11/30.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 7, 2025)
Total Trades: 143 (1% of total trades).
Performance Summary:
Long Indicators: 102/111 reached avoid-trading levels, tightening by -9.41 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 9 tightened by -2.77 bp.
Remaining Shorts: 5 tightened by -13.74 bp.
Average Spread Movement: ±7.44 bp in the indicated direction.
Success Rate: 92% 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.