Systematic Credit and Equity G-255 Trading Indicators for September 12, 2025
Good Morning While much has been written about employment and inflation data, our trading model's indicator accuracy relating to UST prices and credit spread movement over the past 3 weeks has been spotty. The model continues to believe the direction of credit spreads is tighter and the direction of UST yields is higher. US equities and credit directionally correlated on Wednesday for the 9th trading day in 15, with credit outperforming. While August PPI inflation data spurred a further rally in UST on Wednesday, we will see CPI data today. Our trading model does not have a short trading indicator for either the 5 or 10Y UST; we have seen (-5 to 10bp) rallies in the 5-10 year Treasury over the past week. Regarding the impact of the expected (-25bp) overnight rate cut from the US Federal Reserve Bank next week, many comments we have read believe a soft CPI number will move the Fed to cut (-50bp). As we have written, there is little correlation between the overnight Fed Funds rate and US 5Y and 10Y Treasury prices.
Earnings outlooks
We will hear from Kroger (KR Baa2/BBB, attractive short debt/attractive long equity) later this morning and Federal Express (FDX Baa2/BBB, attractive short both debt and equity) next week, which should provide clearer insight into the impact of tariff litigation on reported earnings. Over the past two weeks, we have observed significantly strong earnings from BBB TMT issuers Dell (Baa2/BBB, attractive short debt and attractive long equity), Broadcom (AVGO Baa1/BBB+, attractive long both debt and equity), and Oracle (ORCL, attractive short debt and attractive long equity), driven by AI investment at a much stronger pace than anticipated.
Capital Flows related to changes in US trade policy
While we saw additional fund inflows into corporate bonds last week, they fell by approximately 30% week-over-week. In contrast, flows into international corporate bond and European corporate bond ETFs grew by 25% week-over-week.
G -255 BBB TMT ISSUER INDICATORS POST EARNINGS
(1) As previously noted, USD TMT is the single largest differentiated constituency in all Corporate Bond indices.
(2) Single A, BBB, and BB issuer USD debt (44 issuers, 702 bonds, $1.2 trillion of market cap) represent the largest differential weighting and performance indicator between USD and non-USD corporate bond indices.
(3) The seven largest BBB TMT issuers (four deleveraging, three releveraging) have 86% as much debt in circulation as the 17 Single A-rated issuers.
(4) High-yield (HY) issuers account for 8% of the total $1.2 trillion in the G-255 TMT sector.
(5) BBB/BB TMT is one of nine sectors where overall leverage is decreasing. The drop in net debt in BBB TMT has been most pronounced in Verizon (VZ Baa1/BBB+), T-Mobile (Baa2/BBB), Broadcom (AVGO Baa1/BBB+), Deutsche Telekom (Baa1/BBB+), and Charter Communications (CHTR Ba1/BBB-). Of these issuers' 169 USD liquid bonds ($269.4 billion), five are considered undervalued, and three issuer bonds have attractive long indicators.
(6) Seventeen of the 20 BBB TMT issuers' equities have trade-long indicators. The two most attractive BBB equity indicators (both long) are Dell and Charter Communications.
Trading Model Indicators and Strategy For Thursday
Our systematic trading model indicates that USD high-yield (HY) and investment-grade (IG) credit are modestly overvalued. Continued inflows into IG credit, combined with 45 sector indicators, suggest higher valuations (tighter IG spreads and elevated HY prices). Unusually, the model identifies 10-year credit as attractive at least until this evening.
Ten weeks ago, the systematic trading model flagged Single A Industrials, BBB Industrials, and BBB Energy as attractive short trading sectors. Over the past four weeks, indicators for both Single A and BBB Industrials have shifted to overvalued. Post-earnings, BBB Energy has now become an attractive long opportunity.
Today's Systematic Trading Sector Indicators
Top 3 Short-Indicated Sectors:
• Big 6 Senior Bank Holdco (USD only)
• USD Single A Healthcare sector (USD only)
• European Single A and BB Energy (all currencies)
Top 3 Long-Indicated Sectors:
• US Regional banks (USD)
• US BBB/BB TMT (USD and EUR)
• French Banks (all currencies)
USD Systematic Trading Model:
This morning's model indicators continue to indicate US credit will tighten or rise in the near term. This despite credit spread widening in 5 of the past 7 trading days and almost $70 billion of new G – 255 supply in just 1 week.
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 157 long/short trades in 2025 (marked via TRACE), 90% achieved ±5 bp targets, averaging ±7.27 bp per trade. Last week saw smaller inflows into US corporate bond ETFs for investment-grade bonds while ETF high yield inflows flipped from outflow to inflow.
Risk Management
The model avoids adding risk to G-255 issuers reporting within 30 days, as global regulatory requirements for reported material events could impact trading without notice.
US Economic Indicators / Inflation and Interest rate outlook
August final demand producer prices fell 0.1% in August after rising 0.7% in July according to the Bureau of Labor Statistics.
Final demand rose 2.6%
Final demand ex food, energy fell 0.1%
Final demand ex food, energy rose 2.8%
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: 14% above average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 94% of top 100 issuer volume and 72% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +22% above average
-G-255 Issuers: 12 of the top 25 traded bonds accounted for 66% of top 25 issuer volume and 69% of total TRACE volume.
Wednesday Credit Market Movement
U.S. CDX Index: -.7 @ 49.0bp
U.S. IG Cash Spreads: (-1 to +-4bp) tighter TMT and Industrials outperforming.
CDX HY Index: +.1 @ 107.4 (per Bloomberg).
HY Cash Bonds: Were higher Wednesday with HY TMT outperforming.
High-Yield Activity
- Dealers bought $1.4 billion HY bonds Wednesday.
Most Bought HY Bonds
- CoreWeave (CRWV B1/B)
Most Sold HY Bonds
- UWM Holdings (UWMC Ba3/BB-)
Investment-Grade Activity
- Dealers bought $1 billion of IG bonds Wednesday.
Most Bought Sector: Yankee Banks
- Deutsche Bank ( Baa1/BBB+ attractive long)
- Toronto Dominion (TD, A2/A- attractive long)
Most Sold Sector: Big 6 banks
- Bank of America (BAC A1/A attractive short)
- Morgan Stanley (MS , A1/A- attractive short)
Attractive Trading Sectors
Long Opportunities
Focus on de-leveraging issuers, including Single A-rated global Autos, BBB-rated TMT, BBB-rated Energy, Euro Yankee Banks and Floating Rate Notes.
Valuation: The stochastic credit trading model identifies 184 undervalued bonds ($279.4 billion), with 79
long trade indicators across the 6,000-bond USD universe.
Short Opportunities
1,510 bonds ($2.34 trillion) are overvalued per the stochastic credit trading model, with 868 short trade indicators.
U.S. Big 6 Banks (All Ratings): 298 bonds ($741.1 billion) overvalued, with 138 short indicators.
Single A and BB Energy: 108 bonds ($165 billion) overvalued, with 67 short indicators.
Single A Healthcare: 118 bonds ($169 billion) overvalued, with 84 short indicators.
Issuer News
Nothing material on Wednesday
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 26% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation
The systematic credit trading indicator (Investment Grade and High Yield) is back to modestly overvalued. A record 140 of the world's 255 largest corporate debt issuers, the highest in the 34-year history of the trading model, are increasing leverage on their balance sheets.
2025 10-Year Credit Spreads
Year-over-Year (YoY): 10-year credit spreads are wider compared to last year.
Year-to-Date (YTD): Spreads are also wider YTD.
UST 10-Year Rates: Up 43 basis points (bp) YoY but down 49 bp YTD.
Spread Widening: The Bloomberg/Moody's 10Y index shows wider spreads due to new bond supply at elevated levels over the past 7 trading days, combined with a 12.5 bp decline in UST 10-year yields over the last 6 trading days.
Global Equity Correlation to IG Credit Spreads
Similar to Monday USD credit and US equities correlated directionally with credit (IG and HY) outperforming US stocks. USD 10Y credit and equity prices have correlated 137 out of 183 trading days in 2025. This is well below normal over the past 33 years. While there is an 80% historic correlation between US equity prices and 10Y US corporate credit spreads, many of the recent geopolitical headlines and US currency fluctuation have led to a temporary de-coupling of the two risk markets.
New USD G-255 supply and fund flow data
Saudi Aramco was the only G–255 issuer selling bonds Wednesday. Its not our role to single out the rating agencies, but the criteria for AAA rating are actually met by Saudi SKUK. Aramco has over $20 bil of USD debt and is re-levering but the bonds will trade well owing to the underlying issuer.
Net inflows to ETFs totaled $10.1b in the week ended Sept. 9, 2025, including the effect of leveraged funds, compared with $7.24b the prior week
Broad bond-market ETFs expanded by $1.86b to $4.57b
Corporate bond ETFs dropped by $1.33b to $137.3m
Investment-grade ETFs dropped by $1.59b to $3.52b,
High-yield ETFs swung by $1.07b to $1.04b
Net inflows totaled $262.9b year-to-date
Thus far in September 38 G -255 issuers have sold $77.6 billion (86 bonds) of new supply. 56% of the supply has been non – financial. YTD totals now stand at 276 G - 255 deals with 665 bonds total $802 billion. This is 9% lower than the same week in 2024.
Systematic Trading Model Indicators and Strategy
Attractive Short Indicators: 868, +100 from Wednesday with 76% of the short trading recommendation rated Single A .
Attractive long indicators: 79, +4 from Wednesday.
Systematic Portfolio Trading Model Indicator:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations, targeting 10-year maturities.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid 7-year maturities due to low attractiveness.
Replace Longs: Replace long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 70% long position hurdle is reached.
Current Status of trading indicators below:
During the last week 4 long trades reached their avoid trading level and was replaced by 5 new issue trade indicators.
Systematic Credit Trading Strategy September 11, 2025
Closed Positions: last week, the long/short basket trade exited 1 new issue and 1 secondary new trade. The Citigroup (A3/BBB+) C 5.174 09/11/36 and Toyota (A1/A-) TOYOTA 4.65 09/03/32 new issues reached their avoid trading level on Wednesday.
Enter New Longs: On Monday the model added the new Merck (Aa3/A+) MRK 5.7 09/15/55. Tuesday trading indicators added the Elevance Health (Baa2/A-) ELV 5 01/15/36 and Capital One (Baa1/A-) COF COF 5.197 9/11/36. Today the Trading Model adds the Citigroup (A3/BBB+) C FRN
3. Enter New Short trades: The trading model indicators show adding short trades for each new long added after the Toyota (TOYOTA) and Citigroup (C) positions are replaced.
4. 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.
5. Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic
6. Monday's Basket Trade long/ short ratio 68.75%
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
Thursday Trading Indicators: The Citigroup (A3/BBB+) C 5.174 09/11/36 and Toyota (A1/A-) TOYOTA 4.65 09/03/32 new issues reached their avoid trading level on Wednesday. The model adds the Citigroup (A3/BBB+) C Float 09/11/31 as new issue trade.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – September 10, 2025)
Total Trades: 157 (1% of total trades).
Performance Summary:
Long Indicators: 112/125 reached avoid-trading levels, tightening by -9.47 bp.
Short Indicators: 27/32 reached avoid-trading levels, widening by +5.48 bp.
Remaining Longs: 13 tightened -.49 bp.
Remaining Shorts: 5 tightened by -16.87 bp.
Average Spread Movement: ±7.20 bp in the indicated direction.
Success Rate: 90% of indicators reached avoid-trading levels, which is normal.
Average trade holding period: (20.11 trading days) below 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.