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Wed, July 2, 2025

Systematic Credit and Equity G-255 Trading Indicators for July 2, 2025

Key Trading Issues and Outlook

  • Earnings Season (July 15, 2025): Balance sheet updates will drive model refinements, particularly for re-levering sectors (e.g., U.S. Big 6 Banks, Single A Industrials, BBB TMT).

  • Credit Inflows: Strong inflows (week ending June 25, 2025) support spread tightening but limit short opportunities.

  • Valuation: Fair valuation as of June 26, 2025, but 752 bonds near 52-week tight/wide spreads suggest potential mispricing.

  • LQD Model: Weekly updates continue until daily CUSIP data is available, enhancing trading precision.

Our trading model indicators showed 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). As of June 26, 2025, model indicators showed fair valuation, supported by significant sideline cash fueling risk-on buying.

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 31 bp YTD) while the S&P 500 is up over 5%. As earnings season approaches (starting July 15, 2025), the model provides daily insights into credit spread movements and trading opportunities across G-255 issuers.

The standalone model indicates long positions in Yankee Banks and Single A TMT, while shorting U.S. Money Center Banks, Single A Healthcare, and Single A Industrials. The LQD model highlights short opportunities in re-levering sectors (U.S. Big 6 Banks, Single A Industrials, BBB TMT) with bonds near 52-week tight spreads. Strong inflows and historical July 4 trends support a bullish near-term outlook, but caution is advised for re-levering issuers as earnings season approaches.

Systematic Trading Model Insights and Trading Strategy

The model tracks over 6,000 bonds, with 752 near 52-week tight or wide spread levels (25% above historical averages).

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), 80% achieved ±5 bp targets, averaging ±7.21 bp per trade.

  • Recent Activity: The model paused adding short positions on July 2, 2025, due to strong credit inflows for the week ending June 25, 2025. Six long indicators hit "avoid" points on June 30 and July 1, 2025. This resulted in the Systematic long/short basket trade becoming "more short."

First Quarter Final Model G-255 Trading / Research Universe Balance Sheet Output:

Financials:

- Big 6 U.S. Banks: 5 of 6 issuers re-levering.

- U.S. Regional Banks: 9 of 13 de-levering.

- Canadian Banks: 4 of 6 de-levering.

- UK Banks: 5 of 7 de-levering.

- Euro Banks: 15 of 19 de-levering.

- Japanese Banks: 3 of 4 de-levering (strongest balance sheets globally).

-Australian Banks: 4 of 4 re-levering.

-Insurance Companies: 5 of 7 re-levering.

Note: Japanese, UK, and French banks have the least credit risk; 75% of global public liquidity resides on these 64 bank and insurance balance sheets.

TMT: 15 Single A issuers (more cash than debt); 22 BBB & BB issuers, 14 re-levering.

Consumer: 12 Single A issuers, 6 re-levering; 11 BBB & BB issuers, 6 re-levering.

Healthcare: 17 Single A issuers, 11 re-levering; 13 BBB & BB issuers, 4 re-levering.

Utilities: 21 Single A & BBB issuers, 17 re-levering.

Airlines: All 3 de-levering.

Autos: 6 Single A issuers, 3 re-levering; 7 BBB & BB issuers, 3 re-levering.

Energy: 10 Single A issuers, 5 re-levering; 12 BBB & BB issuers, 7 re-levering.

Industrials: 11 Single A issuers, 8 re-levering; 12 BBB & BB issuers, 9 re-levering.

Sector Trading Indicators For Wednesday:

Long: Yankee Banks, Single A TMT (strong balance sheets, low credit risk).

Short: U.S. Money Big 6 Banks, Single A Healthcare, Single A Industrials (re-levering, tight spreads).

LQD Systematic Credit Trading Model Analysis

The LQD model, applied to the iShares iBoxx $ Investment Grade Corporate Bond ETF, operates independently and focuses on LQD's portfolio holdings. Key details:

  • Coverage: Tracks 66% of LQD's bonds, representing 87.23% of its holdings value.

  • Updates: Weekly outputs until daily CUSIP changes are available, showing how credit spread movements impact trading indicators.

Trading Model Insights

Our model covers approximately 66% of LQD's bonds and 87.23% of its holdings value, as shown in the table below:

Short Signals: On July 2, 2025, "attractive short" indicators for LQD bonds increased by 98 to 479, driven by:

  • U.S. Big 6 Banks: Majority of bonds from re-levering issuers, trading within 10% of 52-week tight spreads.

  • Single A Industrials: Similar re-levering and tight spread dynamics.

  • BBB TMT: Re-levering issuers with bonds near 52-week tight spreads.

Earnings Season: Post-July 15, 2025, balance sheet updates will refine LQD model outputs.

Tuesday's U.S. Credit Trading

Investment-Grade (IG) Trading

-Volume: 33% above average

-G-255 Issuers: 97 of the top 100 traded issuer bonds, accounting for 95% of top 100 issuer volume and 77% of total TRACE volume.

High-Yield (HY) Trading

-Volume: Average on Tuesday

-G-255 Issuers: 18 of the top 25 traded bonds, accounting for 69% of top 25 issuer volume and 55% of total TRACE volume.

Market Movement

U.S. CDX Index: Tightened (-.5 bp) Tuesday @ 50.5 bp

U.S. IG Cash Spreads: Ranged from -1 bp to -6 bp tighter; US BBB Fins and BBB TMT outperformed.

CDX HY Index: unchanged @ 107.5 (per Bloomberg)

HY Cash Bonds: BB TMT and Healthcare bonds were top performers. HY Utilities was the worst performing sector.

High-Yield Activity

- Dealers bought $900 million of HY bonds on Tuesday. That is the 11th day in 13 that dealers have bought "Junk" paper.

Most Bought HY Bonds by End Users

- Wesco Distribution (WCC, Ba3/BB)

Most Sold HY Bonds by End Users

- Ford Motor Credit (F, Ba1/BBB- attractive short)

- New Issue Venture Global (VEGPL Ba2/BB+)

Investment-Grade Activity

- Dealers net sold $4.1 billion of IG bonds Tuesday.

Most Bought End-User Bonds

- Coca Cola (KO, A1/A+ attractive short)

- Hyundai Capital (A3/A- attractive long)

Most Sold Issuer Bonds

- Mizuho (MIZUHO A1,A- attractive long)

- Takeda (TACHEM Baa1, BBB+ attractive long)

Inflation, Economic Data, and Interest Rates

  • ISM manufacturing index rose +0.5 pt to 49. New orders fell the most in three months and employment fell for fifth consecutive.

  • ISM prices paid rose to 69.7, but are still below 2018 levels.

Attractive Trading Sectors

Long Opportunities

  • None. 198 bonds ($282.3 billion) are considered undervalued by the stochastic credit trading model with 76 attractive long trade indicators for the entire 6,000 bond universe.

Short Opportunities

  • U.S. Big 6 Banks (All Ratings): $731.1 billion in overvalued market capital across 288 bonds, with 142 short indicators.

  • Single A and BBB Industrials $128.1 billion in overvalued market capital across 102 bonds, with 51 short indicators.

Issuer News

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  • The FTC has opened an in-depth investigation of SoftBank (SOFTBK BB+ attractive long) Group Corp.'s $6.5 billion acquisition of Ampere Computing LLC i. s facing a potentially lengthy probe by the US Federal Trade Commission.

  • Stellantis NV's (STLA Baa2, attractive short) US deliveries fell 10% in the second quarter despite sales increases for Jeep and Ram brands.

U.S. IG Credit Valuation and Spreads

  • Spread Recovery: U.S. credit spreads have recovered 40% of the widening observed from November 12, 2024, to April 10, 2025. Post Tuesday's rally US credit spreads are now tighter over the past 7 trading days.

  • Valuation: U.S. credit is remains fairly valued.

Global Equity Correlation to IG Credit Spreads

With credit prices and spreads rallying with while the S&P 500 was flat and the US Dow Jones Industrial average +91% higher on Tuesday, credit has now moved in the same direction as equity prices in 47 of the past 53 trading days.

New Supply, Bond Maturities, and Credit Fund Inflows for June -

Month of June 2025 new USD G-255 supply ended with a flourish with four large cap de-levering issuers printing $10 billion of new supply over the last week of the month.

Sumitomo Financial Group (SUMIBK, A2/A- ), SoftBank Corp (SOBKCO, BBB/BBB+), Mizuho Financial Group Inc (MIZUHO, A1/A-) and Takeda Pharmaceutical (TACHEM, Baa1 / BBB+) sold 10 issues that were priced attractively according to our trading model.

Year to date USD G-255 supply is just shy of $600 bill and running about 14% below 2025 first six month levels. We will have June fund inflows and G-255 EUR supply data on Monday.

Systematic Trading Model Indicators and Strategy

Model Output

  • 676 attractive short indicators: 130 more than Tuesday, marking the highest number of short trades since November 26, 2024.

  • 76 attractive long indicators: 2 more than Tuesday.

Weekly Trading Strategy (ending July 3) Model output changes slightly until Thursday's fund flow data.

  • Prioritize long positions in deleveraging new issues with attractive valuations.

  • Add shorts of relevering issuers with the deepest discount from their model avoid point.

  • Systematic Portfolio Trading Model Indicators: Add 1 short for each 1 long position – Note number of long positions has declined by (-5) 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

  • Union Pacific (UNP, A3/A-): UNP 5.1% 2/20/35 are two of 5 new issue indicators published before February 23, 2025, that has not reached its avoid trading level.

  • Barclays (BACR, Baa1/BBB+): BACR 5.785% 2/25/36 reached reached its avoid trading level Tuesday.

  • Cisco (Aa1/A-) CSCO 4.95 3/4/32 reached its avoid trading level on Tuesday

  • Walmart, (Aa2/AA) WMT 4.9 4/28/35 reached its avoid trading level on Tuesday.

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 1, 2025)

Total Trades: 127 (1% of total indicators).

Performance Summary:

  • Long Indicators: 77/96 reached avoid-trading levels, tightening by -9.94 bp.

  • Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.

  • Remaining Longs: 19 tightened by -2.84 bp.

  • Remaining Shorts: 4 tightened by -11.5 bp.

  • Average Spread Movement: ±7.21bp in the indicated direction.

  • Success Rate: 82% of indicators reached avoid-trading levels (8% below normal).

  • Average trade holding period: (26 trading days) + 27% above 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.