Systematic Credit and Equity G-250 Trading Indicators for June 16, 2025
Market Context and Historical Perspective
Years ago, while managing a large long/short credit book at Ronin Capital, my risk manager frequently asked how the book would react to a hypothetical nuclear conflict between Israel and Iran. While global markets have evolved significantly over the past 12–15 years due to technological advancements, changes in capital flows, and shifting trading dynamics, the U.S. equity and credit markets' response to Friday's Middle East hostilities highlights their increased insulation from global conflicts compared to the past. On Friday, credit trading model showed some sectors widening and others tightening, with overall trading volumes 20% below average.
U.S. Equity and Credit Market Dynamics
Recent headlines have labeled U.S. equities as "overvalued," with implications for credit markets. While certain technology issuers exhibit extreme valuations, sectors like automotive, travel, consumer goods, and financials remain attractively priced. The world's 255 largest companies (164 U.S.-domiciled) have sustained a strong bid for equities through record share repurchasing, even at elevated valuations. Combined with a $7 trillion cash reserve frequently highlighted in our reports, this dynamic explains why U.S. equities appear overvalued on a relative value basis—a trend persistent over the past five years. For equities to decline significantly, a major catalyst or disruption to share repurchasing and cash inflows would be required.
Systematic Credit Model Portfolio Trading Strategy – Monday, June 16, 2025
Of the 6,000+ bonds in our research universe, 557 are trading near their 52-week tight or wide spread levels, consistent with historical averages. The trading model observes:
65% long/short positioning strategy.
35% allocated to front-end indicators, with 70% in floating-rate notes (FRNs) maturing in three years or less, targeting undervalued, deleveraging bonds.
The number of attractive short indicators from the model is slightly above the long-term average but remains moderate.
Key Trading Issues for Friday
Due to Middle East developments, sectors such as leisure, travel, and lower-tier bonds underperformed. However, overall trading volume was 20% below normal, reflecting muted market activity.
Earnings Season Insights
For the past six quarters, the world's 255 largest corporate debt issuers have shown expanding balance sheets. However, the BBB and Single A TMT (Technology, Media, Telecom) sectors reduced debt in circulation in Q1 2025, as noted in our June 12 report. Unlike the broader group, TMT issuers aligned shareholder returns with revenue growth in Q1 2025.
Net Income: Rose $38.4 billion to $184.5 billion (+26% YoY), driven expanding margins associated with AI revenue growth.
Revenue: +9.2% YoY.
Operating Margin: Rose 50 bps YoY.
Dividends and Share Repurchases: +9.5% YoY, aligned with revenue and cash flow growth.
Net Debt: +$28.47 billion quarter-over-quarter (QoQ), and +$16.1 billion YoY.
Debt Issuance: +$12.9 billion QoQ; -$29 billion of Single A TMT debt retired YoY.
Liquidity: Decreased $15.5 billion QoQ and $45.5 billion YoY, reflecting a shift in Single A TMT balance sheets from cash and short-term investments to marketable securities.
Friday's U.S. Investment-Grade and High-Yield Credit Trading
Investment-Grade (IG) Trading Volume: -19% below average. G-255 Issuers: Accounted for 93 of the top 100 traded bonds, representing 95% of top 100 issuer volume and 74% of total TRACE volume.
High-Yield (HY) Trading Volume: 20% below average. G-255 Issuers: Accounted for 15 of the top 25 traded bonds, representing 63% of top 25 issuer volume and 58% of total TRACE volume.
Market Movement
U.S. CDX Index: +2.5bp wider at 56 bp.
U.S. IG Cash Spreads: unchanged to +2 bp wider. Outperformers: Single A Healthcare and Energy.
CDX HY Index: -.4 at 106.4 bp (per Bloomberg).
HY Cash Bonds: Were slightly lower overall, with Tier 2 Financials underperforming.
High-Yield Activity - U.S. dealers were lifted out of $200mm of HY paper for the first time in 8 trading days.
Most Bought HY Bonds by end users:
Tenet Healthcare (THC, attractive long) was the only issuer that had net purchase of more than $15mm on Friday.
Most Sold HY Bonds by end users:
SABR Holdings (SABHLDG, B3/B-, not in our trading universe) were the most sold bonds on Friday .
Investment-Grade Activity -End users bought roughly $500mm of USD IG debt on Friday.
Most Bought End-User Bonds:
Lloyds Bank (LLOYDS, A3/BBB+, attractive long).
Pacific Gas& Electric (PCG, Baa1/BBB attractive short).
Most Sold Issuer Bonds:
Broadcom (AVGO, Baa1/BBB+, attractive long).
Inflation, Economic Data, and Interest Rates
University of Michigan consumer sentiment survey for June rose to 60.5 vs. 52.2 in May
Expectations index rose to 58.4 vs. 47.9 last month
Expected change in median prices during the next year fell to 5.1% after 6.6%
Expected change in median prices during the next 5-10 years fell to 4.1% after 4.2%
UST 10Y rates rose +3bp week over week to 4.43%
Attractive Trading Sectors
Long Opportunities
None: 190 bonds ($272.2 billion) are undervalued, with 67 attractive long indicators by the trading model.
Short Opportunities
U.S. Big 6 Banks (All Ratings): $655 billion in overvalued market capital across 257 bonds, with 60 short indicators.
Energy (All Ratings): $193 billion in overvalued market capital across 133 bonds, with 82 short indicators.
BBB TMT: $193 billion in overvalued market capital across 114 bonds, with 40 short indicators.
Single A Healthcare: $142 billion in overvalued market capital across 100 bonds, with 42 short indicators.
Issuer News
BPCE (BPCEGP, Baa1/BBB+ attractive long): Lone Star will sell its majority stake in Portugal's Novo Banco SA to French banking group BPCE, valuing Novo Banco at around €6.4 billion.
Boeing BA, Baa3/BBB- attractive long): predicts airlines will need 43,600 new aircraft over the next 20 years, driven by growth in markets like China and Southeast Asia.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 45% of the expected widening from November 12, 2024, to April 10, 2025, after widening by +2 to +4 bp over the past two days.
Valuation: U.S. credit is now overvalued but not yet in the middle of the overvalued to most overvalued range.
Global Equity Correlation to IG Credit Spreads
While equities were down roughly (-1.5%) on Friday, with Dow stocks down (-1.8%) US corporate bond credit spreads did not widen in most cases by more than (+3bp). While we have now seen US credit spreads follow Equity direction on over 80% of the 2025 trading days, the disparity in the magnitude of return of the two risk markets has narrowed significantly since June 1.
New Supply, Bond Maturities, and Credit Fund Inflows for June
We have seen no new G–255 USD supply since Tuesday.
Thus far in June 12 G–255 issuers have sold 25 tranches of new bonds totalling $20.1 billion. While in Europe 18 issuers have sold 27 tranches of new bonds totalling €24 billion
Fund Flows: according to LSEG Lipper continue above average over the past 3 weeks ended June 11
Systematic Trading Model Indicators and Strategy
Model Output
490 attractive short Indicators: 93 greater than Friday, 13.7% below average, signaling slight overvaluation. The largest increase in attractive short indicators Friday was in Single A Healthcare and Single A Consumer.
67 attractive long Indicators: down 3 from Friday.
Weekly Trading Strategy (Ending June 20)
Model output unchanged until next Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Avoid adding short positions until attractive short indicators exceed 400 and weekly fund inflows fall below $1.5 billion.
Systematic Portfolio Trading Model Indicators: Short one bond for each bond added long.
Systematic Credit Indicators
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 Model Trading Indicators
Union Pacific (UNP, A3/A-): UNP 5.60% 12/01/2054 is one of 10 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.
Morgan Stanley (MS, A1/A-): MS 2.943 1/21/33 reached its avoid trading level on Friday.
Sample Trade Performance Report (January 4, 2025 – June 13, 2025)
Total Trades: 117 (1% of total indicators).
Performance Summary:
Long Indicators: 70/89 reached avoid-trading levels, tightening by -9.95 bp.
Short Indicators: 24/28 reached avoid-trading levels, widening by +5.3 bp.
Remaining Longs: 19 widened by +1 bp.
Remaining Shorts: 4 tightened by -4.75 bp.
Average Spread Movement: ±6.87 bp in the indicated direction.
Success Rate: 80% of indicators reached avoid-trading levels (10% below normal).
Notes:
Initial indicators based on TRACE print (or new issue price) at indicated date.
Avoid Indicators based on TRACE print trade at the "avoid point" on the trade date.
Recent Performance (Since May 15, 2025)
21 long Indicators hit avoid-trading levels, contributing -1.46 bp to overall spread tightening for the 70 long trades.
Overall performance improved from ±4.91 bp to ±6.97 bp across 117 sample trades.
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.