Systematic Credit and Equity G-255 Trading Indicators for August 14, 2025
Good morning! We have already published the quantitative data on CPI, reported earnings, trade tariff impacts, and political pressure to lower interest rates at the September 17 meeting. While another month of employment and inflation data is forthcoming, the September meeting will likely result in a minimum overnight rate cut of 25 basis points. What "the market is discounting" beyond this is outside the scope of quantitative data.
US equities are at all-time highs, with FactSet and YCharts reporting upside earnings surprises well above 5-year averages and the S&P 500 trading at approximately 23x forward Price/Earnings. We take this information as provided. Our equity indicator, covering the 255 largest debt issuers (180 of which are US-based), shows that only 66% of the underlying issuer equity is overvalued relative to its 200-day trading average.
This is relevant because our trading model currently identifies 1,007 attractive short trading indicators. For US credit spreads to widen and US high-yield bonds to decline in price, four conditions must be met: (1) ETF/retail corporate bond outflows, (2) a 10% equity decline, (3) extreme credit valuations, and (4) issuer overleverage. Two out of four conditions are insufficient to drive credit wider or lower.
While we are 10% from extreme overvaluation in both high-yield and investment-grade bonds, our trading model indicators suggest credit is not yet poised to move wider or lower.
Our 5th credit sector 2Q earnings review comes with the 4 Japanese banks (3 are de-levering).
Here's a comparative analysis of key operating metrics for Japanese banks
Japanese G-255 issuers 2Q 2025 Sector Operating Metrics
Size Comparison
The Big 6 banks have ~40% larger loan books and are ~80% larger than the top four Japanese banks.
The Big 6 banks' combined balance sheets are ~2.4x the size of the four largest Japanese banks' balance sheets.
Capital Strength
Japanese banks hold ~100 basis points less CET1 equity capital (12.0%) than the largest US banks.
Revenue Growth
Japanese banks saw the largest revenue decline (-7% YoY) of any banking sector globally in 2Q 2025.
Loan Growth
Japanese loan growth slowed significantly in 2Q 2025 due to changes in the "carry trade."
Shareholder Returns
Three of the four large Japanese banks announced significant share buybacks in 1Q earnings, but cash flow statements have yet to reflect balance sheet impacts.
Japanese G-255 issuers 2Q 2025 Sector Balance Sheet
.Japanese Banks: 2Q 2025 Balance Sheet Metrics
Liquidity
Japanese banks have higher liquidity than any other banking sector globally.
Debt Levels
Short-Term Debt: Japanese banks have ~25% less short-term debt as a percentage of their balance sheets compared to other global banks.
Long-Term and Net Debt: Like French and UK banks, the four large Japanese banks have less long-term and total debt than cash, driven by a very low loan/deposit ratio.
Trading Allocation Strategy: Japanese USD corporates represent the lowest risk of all bank bonds in the G-255 trading universe.
Systematic Trading Model:
The next move is still tighter/higher in credit according to this morning's systematic trading model indicators.
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 144 long/short trades in 2025 (marked via TRACE), 92% hit ±5 bp targets, averaging ±7.55 bp per trade.
Recent Activity: Between June 30 and August 13, 2025, 22 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. The trading model added another new issue long trade on Wednesday.
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
Total carloads for the week ending August 9 were 227,327, up 2.4% YoY. Weekly intermodal volume was 283,867 containers and trailers, up 3.4% YoY, slightly below the two-year average.
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -2% below average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 90% of top 100 issuer volume and 71% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -5% below average
-G-255 Issuers: 11 of the top 25 traded bonds accounted for 55% of top 25 issuer volume and 35% of total TRACE volume.
Market Movement
U.S. CDX Index: -.5bp @ 49.5bp
U.S. IG Cash Spreads: were (-1 to -2bp) tighter with BBB credit outperforming.
CDX HY Index: +.2 @ 107.5 (per Bloomberg).
HY Cash Bonds: TMT and Energy issuer HY debt were the best performing sectors on Wednesday.
High-Yield Activity
- Dealers bought $900mm of HY bonds Wednesday.
Most Bought HY Bonds
- Venture Global LNG (VENLNG B1/BB)
Most Sold HY Bonds
- goeasy Ltd (GSYCN Ba3/BB-)
Investment-Grade Activity
- Dealers bought $1.6 bil of IG bonds Wednesday.
Most Bought Sector: None
Most Sold Sector: Big 6 Banks
- Bank of America (BAC, A1/A attractive short)
- Goldman Sachs (GS A2/BBB+ attractive short)
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 157 bonds ($212.9 billion) are considered undervalued by the stochastic credit trading model, with 48 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1520 bonds ($1.73 trillion) are considered overvalued by the stochastic credit trading model with 1007
short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $742.4 billion in overvalued market capital across 296 bonds, with 198 short indicators.
Single A Industrials: $102 billion, in overvalued market capital across 102 bonds, with 78 short indicators.
Single A and BB Energy $176.1 billion in overvalued market capital across 107 bonds, with 79 short indicators.
Single A Consumer $113.8 billion in overvalued market capital across 96 bonds, with 65 short indicators.
Issuer News
Among the G-255 largest global corporate debt issuers, 92 are reducing leverage, while 100 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-Five issuers are yet to report for June–August.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 41% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Market Conditions
Credit Trading Model Valuation: U.S. credit remains overvalued based on output from our credit trading model. Given the number of issuers re-levering (137 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 and wider YTD.
UST 10Y rates are +39.7 bp higher YoY and -33.4bp YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads, HY prices and U.S. equity prices correlated for a second straight trading day and the 136th in 158 trading days in 2025. tighter. While credit spread movement has an 80% correlation with equity price movement, the magnitude of these moves has changed markedly over the past two years. This owes to the world's largest corporates using balance sheet to fund equity share repurchases and dividend payouts.
New Supply, Bond Maturities, and Credit Fund Inflows for August
No new supply from any G-255 issuers on Wednesday.
Net inflows to ETFs totaled $12.6b in the week ended Aug. 12, 2025, including the effect of leveraged funds, compared with $9.22b the prior week
Corporate bond ETFs expanded by $2.35b to $5.78b
Investment-grade ETFs expanded by $5.8b to $9.69b, and high-yield ETFs dropped by $1.04b to $569.9m
Government bond ETFs expanded by $3.1b to $3.15b
Net inflows totaled $223.2b year-to-date
Vanguard Short-Term Corporate Bond ETF had the biggest inflow, of $2.29b
IShares Broad USD High Yield Corporate Bond ETF had the biggest outflow, of $387.5m
Month-to-Date Issuance: G-255 supply hit $43.625 billion for the Month of August from 22 issuers (51 bonds). Thus far, 6 de-levering G-255 issuers (the same number of attractive balance sheets that came to market after 15 July) have sold 19 bonds totaling $17.4 billion in August.
Systematic Trading Model Indicators and Strategy
Model Output
1007 Attractive short indicators . 61 more than Wednesday and 85% above the 200 day moving average.
54 attractive long indicators: +6 from Wednesday and within 25% of "attractive short" overall credit market indicator.
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:
21 long trades reached their avoid trading levels in the past 35 days and were replaced by 9 new issue and new short trade indicator.
Systematic Credit Trading Strategy August 14, 2025
Closed Positions: Tuesday the long/ short basket trade exited the Barclays (Baa1/BBB-) BACR FRN 11/11/29. Wednesday the long/ short basket trade exited the CVS (Baa3/BBB) CVS 5 09/15/32
Enter New Longs: On Monday the model indicator added CVS (Baa3/BBB) CVS 5 9/15/32 as a new issue long trade.
Enter New Short trades: Last week the trading model 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.
Monda Basket Trade long/ short ratio 62%
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
On Wednesday the CVS (Baa3/BBB) CVS 5 09/15/32 reached its avoid trading level
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – August 13, 2025)
Total Trades: 144 (1% of total trades).
Performance Summary:
Long Indicators: 103/113 reached avoid-trading levels, tightening by -9.42 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 9 tightened by -5.55 bp.
Remaining Shorts: 5 tightened by -15.36 bp.
Average Spread Movement: ±7.58 bp in the recommended direction.
Success Rate: 92% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.7 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.