Systematic Credit and Equity G-255 Trading Indicators for July 7, 2025
Good Morning: Our trading model forecasted an 88% probability of improved credit valuations during the July 1-3 trading period. Credit spreads tightened by 4 to 8 basis points from Tuesday to Thursday, while the High Yield CDX increased by nearly 2 points to 107.95, now within 2 points of its two-year high. Strong retail Investment Grade fund inflows were reported on Wednesday and Thursday, while High Yield fund inflows dropped from their 12-month highs observed the previous week. This aligns with the systematic trading model's output, maintaining the portfolio trading strategy at its current level, consistent for the past four weeks.
Friday's non-farm payrolls data is not included in the model input; however, the reported unemployment rate of 4.1% and weekly initial jobless claims, which show year-over-year declines, are incorporated into the credit trading model hierarchy and reflected in the weekly trading strategy output.
As noted previously, the trading model serves dual purposes as a risk assessment and measurement tool, in addition to its primary function of generating credit trades. The model produces 12,400 trade indicators daily for 6,200 bonds. This week's summary data indicators for the LQD ETF, processed through the model's data hierarchy, remain consistent with prior outputs.
Week of 7 July Systematic Trading Indicators for US LQD ($30 billion):
Systematic Trading Model LQD Analysis
The Systematic Trading Model tracks the world's 255 largest issuers of corporate debt, each with at least $15 billion in tradable debt across USD, GBP, and EUR. The LQD fund comprises 2,916 bonds, with the model providing daily indicators for 2,140 of these, representing 86.61% of the LQD fund's total market capitalization.
As of this morning, approximately 52% of LQD holdings are from issuers increasing leverage on their balance sheets, compared to 54% of the global 255 issuers. The model identifies 836 bonds as overvalued, with 547 flagged as short trade opportunities based on current spread levels.
Conversely, 39 bonds in the LQD are deemed undervalued, with 6 identified as attractive long trades.
The LQD is underweight in Yankee exposure but has recently increased exposure to Japanese new supply in banks and healthcare, which the model considers attractive for long trades. Financials constitute only 29% of LQD holdings, indicating an underweight position in banks and insurance. The fund is also underweight in Auto Finance. Overweight sectors include TMT (all investment-grade), Consumer Non-Durables (all investment-grade), Healthcare (all investment-grade), and Industrials (all investment-grade). Despite recent spread tightening, only 28% of bonds (44% of LQD holdings) are considered overvalued by the model.
The average holding size of a bond in the LQD exceeds $1.5 billion.
The model currently flags Single A-rated Healthcare, Energy, Large U.S. Banks, and Consumer issuers as overvalued due to increased balance sheet leverage. However, these valuations may shift during the earnings season (July 15 – August 15).
Systematic Trading Model Insights and Trading Strategy Monday:
The model tracks over 6,000 bonds, with 813 within 20% of their 52-week tight or wide spread levels (46% above historical averages).
Current Trading Strategy:
62% long, 18% short, 20% front-end allocation (67% in floating-rate notes maturing within 3 years, targeting undervalued, de-levering bonds).
Performance: Of 127 long/short trades (marked to market via TRACE) published in 2025, 87% achieved ±5 bp targets, averaging ±7.35 bp per trade.
Recent Activity: The model paused adding short positions on July 2, 2025, due to strong credit inflows for the weeks ending June 25 and July 2, 2025. 9 long trade indicators hit "avoid" points between June 30 and July 3, 2025. This resulted in the Systematic long/short basket trade becoming "more short."
Despite a 35-year directional correlation between U.S. equities and credit risk, 2025 shows wider U.S. credit spreads (10-year UST rates down -24 bp YTD) while the S&P 500 is up over 6.7%. As earnings season approaches (starting July 15, 2025), the model provides daily insights into credit spread movements and trading opportunities across G-255 issuers.
Our trading model indicators projected a strong July 1-3, 2025, market performance, driven by credit inflows and historical tightening trends (credit spreads tightened in 20 of the past 25 July 4 weeks). Historic data for the week following 4 July (10 days prior to US Big 5 banks reporting results) shows no material improvement in credit valuations over that 7 day trading period.
Systematic Trading Model Insights and Trading Strategy (July 7, 2025)
The Systematic Trading Model uses data for over 6,000 bonds, with 813 currently within 20% of their 52-week tight or wide spread levels (46% above historical averages).
Current Trading Strategy
Allocation: 62% long, 18% short, 20% front-end allocation (67% in floating-rate notes maturing within 3 years, targeting undervalued, de-levering bonds).
Performance: Of 127 long/short trades (marked to market via TRACE) published in 2025, 87% achieved ±5 bp targets, averaging ±7.35 bp per trade.
Recent Activity: The model paused adding short positions on July 2, 2025, due to strong credit inflows for the weeks ending June 25 and July 2, 2025. Between June 30 and July 3, 2025, 9 long trade indicators reached "avoid" levels, shifting the long/short basket trade to a "more short" stance.
Sector Trading Indicators for Monday
Long: Yankee Banks, Single A TMT (strong balance sheets, low credit risk).
Short: U.S. Big 6 Money Center Banks, Single A Healthcare, Single A and BBB Industrials (re-levering, tight spreads).
The model avoids adding risk to any G-255 issuers scheduled to report results within 30 days, in compliance with global regulatory requirements to report "material events" within 30 days of a scheduled earnings release.
Model Characteristics
Systematic credit trading relies exclusively on publicly available information, with no subjective or human input incorporated into the model's intellectual property.
Thursday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: 55% below average
-G-255 Issuers: 96 of the top 100 traded issuer bonds, accounting for 94% of top 100 issuer volume and 71% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -64.5% above average on Wednesday
-G-255 Issuers: 15 of the top 25 traded bonds, accounting for 61% of top 25 issuer volume and 56% of total TRACE volume.
Market Movement
U.S. CDX Index: -1bp tighter Thursday @ 49.5 bp
U.S. IG Cash Spreads: Ranged from (-1 to -4bp) bp tighter; US Transports and Autos outperformed.
CDX HY Index: rose +.25 pt @ 107.95 (per Bloomberg)
HY Cash Bonds: BB TMT and Auto bonds were top performers.
High-Yield Activity
- Dealers neither net bought or sold HY bonds Thursday.
Most Bought HY Bonds by End Users
- No Issuers saw more than $20mm of net purchases on Thursday
Most Sold HY Bonds by End Users
- No Issuers saw more than $20mm of net sales on Thursday
Investment-Grade Activity
- Dealers net sold $200 million of IG bonds Thursday.
Most Bought End-User Bonds
- General Motors Finance (GM, Baa2/BBB attractive short)
Most Sold Issuer Bonds
- Citigroup (C, A2/BBB+ attractive long)
Inflation, Economic Data, and Interest Rates
US June nonfarm payrolls rose 147k in June
May nonfarm payrolls were revised up to +144k from +139k
Average hourly earnings +0.2% in June and 3.7% YoY.
Unemployment rate 4.1% vs 4.2% in May
The lower unemployment rate relates to higher US government payroll adds and lower labor force participation.
From a quantitative perspective, except in times emergency, the Fed has never lowered rates when the unemployment rate was below 4.4%.
Initial jobless claims for the week ending June 26 dropped – 18k YoY to 233k. Quantitatively speaking , except in times of emergency, the US Fed has never lowered interest rates when the 4 week moving average of weekly jobless claims was below 250K
Attractive Trading Sectors
Long Opportunities
None. 178 bonds ($248.3 billion) are considered undervalued by the stochastic credit trading model with 65 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1364 bonds ($1.359 trillion) are considered undervalued by the stochastic credit trading model with 739 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $727.3 billion in overvalued market capital across 288 bonds, with 149 short indicators.
BBB TMT $222.5 billion in overvalued market capital across 132 bonds, with 75 short indicators.
Single A, BBB and Industrials $149 billion in overvalued market capital across 119 bonds, with 64 short indicators.
Single A Healthcare $173.3 billion in overvalued market capital across 119 bonds, with 46 short indicators.
Issuer News
Shell Plc (RDSALN, Aa2/AA-, attractive long): Shell anticipates significantly lower second-quarter trading results in gas and oil compared to the prior three months, driven by market volatility. The company, set to report Q2 results on July 31, 2025, forecasts 60% growth in global liquefied natural gas demand by 2040.
Nissan (NSANY, Ba2/BB, attractive long): Nissan plans to issue approximately $5 billion in debt to support its turnaround efforts, including ¥150 billion in convertible bonds and $4 billion in unsecured debt. The company aims to raise over ¥1 trillion through debt issuance, asset sales, and lease-back arrangements to revitalize its aging product lineup and address a looming loan repayment wall.
AstraZeneca (AZN, A1/A+, attractive short): AstraZeneca is negotiating with Summit Therapeutics to license its lung-cancer drug ivonescimab, with a potential deal valued at up to $15 billion.
U.S. IG Credit Valuation and Spreads
Spread Recovery: U.S. credit spreads have recovered 60% of the widening observed from November 12, 2024, to April 10, 2025. Post last week's rally US credit spreads are now materially tighter over the past 7 trading days.
Valuation: U.S. credit remains overvalued based on output from our credit trading model.
Global Equity Correlation to IG Credit Spreads
Credit spreads and prices again advanced in the same direction as the S&P 500 was +.83% and the US Dow Jones Industrial average +.77% higher on Thursday, credit has now moved in the same direction as equity prices in 49 of the past 55 trading days.
New Supply, Bond Maturities, and Credit Fund Inflows for July
Net inflows to ETFs totaled $7.25b in the week ended July 1, 2025.
US fund flows for the week ended July 2, compared to a week earlier, according to LSEG Lipper.
Short and intermediate investment-grade bonds: $3.88b inflow vs. $1.32b inflow
High-yield notes: $811m inflow vs. $3.52b inflow
Treasuries: $3.49b outflow vs. $74.4m outflow
US leveraged loans: $872.2m inflow vs. $306.4m inflow
Mortgage-related: $137.6m outflow vs. $114.5m inflow
Systematic Trading Model Indicators and Strategy
Model Output
768 attractive short indicators: 31 more than Thursday, marking the highest number of short trades since November 21, 2024.
62 attractive long indicators: 14 lower thank Thursday.
Weekly Trading Strategy (ending July 10) Model output changes slightly until Thursday's fund flow data.
Prioritize long positions in deleveraging new issues with attractive valuations.
Add shorts of re-levering issuers with the deepest discount from their model avoid point.
Systematic Portfolio Trading Model Indicators: Replace Systematic attractive longs that have reached their avoid trading level. Once the systematic 80% long hurdle is met, then1 short for each 1 long position – Note number of long positions has declined by (-11) since last Thursday.
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.
Most Recent Systematic long/short trades:
Delta Airlines ( Baa2/BBB) DAL 5 1/4 07/10/30 reached its avoid trading level Thursday.
US Bank (A3/A) USB 5.046 02/12/31 reached reached its avoid trading level Thursday.
Union Pacific (A3/A-) UNP 5.1 02/20/35 reached its avoid trading level Thursday.
Enbridge (Baa2/BBB+) ENBCN 5.55 06/20/35 reached its avoid trading level on Thursday.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 3, 2025)
Total Trades: 128 (1% of total indicated).