Systematic Credit an Equity G-250 Trading Summary

Good morning! Debating questions like "Who buys US risk if Donald Trump retains US Fed Chair Jerome Powell?" or "Who invests when Fed speakers hint at a June rate cut if data aligns?" feels like chasing shadows. I'm too seasoned for that. Markets are never wrong, and our stochastic systematic trading strategy has signaled "long only" for a month—a stance we've followed and communicated. I attribute market behavior to elevated US cash levels since 2020, but the "why" is less important than the signal.

Notably, this 27-day "long only" model output is only the second such occurrence since 2016.

Earnings Season

On Thursday, 18 of the world's largest corporate debt issuers reported results, and with this morning's reports, we've covered them all. No financial issuers reported prior to this morning's Nomura update. Here's the current state of non-financial issuer balance sheets:

US bank leverage increased by over 4% quarter-over-quarter (QoQ), while non-financial net debt grew by less than 3% QoQ. As Yogi Berra famously said, "It ain't over 'til it's over." Notably, large corporate debt has outpaced revenue growth for major corporations both QoQ and year-over-year (YoY).

To be clear, this trend is not sustainable in the long term.

Thursday's US IG Credit Trading:

Credit markets tracked equities, with the US IG CDX spread tightening by 2.3 basis points to 66.7 and cash bond spreads tightening by 1 to 8 basis points. Autos and Technology sectors led performance, with no trading sector showing wider spreads on Thursday.

New issues from American Express (AXP), JPMorgan (JPM), and Mars outperformed secondary bonds, with front-end bonds experiencing stronger demand. Investment-grade (IG) trading volumes were 15% above average, with greater end-user selling in non-investment-grade bonds compared to investment-grade bonds.

Systematic Trading, Outflows, Earnings Reports, and Headline Risk

On Thursday, 18 of the world's largest corporate debt issuers, ranging from Italian energy producer ENI (ENIIM) to US consumer issuer Keurig Dr Pepper (KDP), reported updates. Six of these issuers, including American Airlines (AAL), Procter & Gamble (PG), and US utility PG&E, revised their outlooks due to aspects of proposed and implemented US tariffs. However, while the lowered guidance impacted five of the 18 issuers, it had minimal effect on their credit spreads.

As to how to trade the current volatility?

US regional and Canadian banks remain the top choices of our "long only strategy" We also saw reports from Verizon (VZ), ATT (T), Philip Morris (PM) and Raytheon Technologies (RTX) that are credit curves out trading model prefers

New supply from key issuers such as State Street Corp (STT), American Express (AXP) and Walmart (WMT) continues to outperform.

The most likely "next move" will be buy de-levering issuer bonds when credit spreads next widen.

Issuer news on Thursday

Most of the issuer news we saw on Thursday is covered in the 18 earnings reports published yesterday and this morning.

Inflation Readings and Government Bonds

Later today we will see University of Michigan April 1 year and 5 year inflation expectations. As we have noted for some time, should US CPI not follow inflation expectations on a 3 – 6 month basis, that would be a rarity in the history of modern economics.

Treasuries jumped after a Federal Reserve official's comments increased the odds of a rate cut as early as June.
The rally was led by short to intermediate-maturity tenors, with yields on two-year notes declining as much as 8 basis points to just below 3.79%.
Federal Reserve Bank of Cleveland President Beth Hammack told CNBC the central bank could move as early as June if it has clear evidence of the economy's direction. Federal Reserve Governor Christopher Waller similarly said he'd support rate cuts if tariffs lead to higher US unemployment.

U.S. IG Credit Valuation

US investment-grade (IG) credit continues to be the "most attractive" for long credit indicators for the 28th consecutive trading day. Thursday's spread tightening has resulted in material spread tightening the past 5 trading days week, though Bloomberg data suggests US IG credit spreads are approximately 6 to 8 bp tighter than the April 10 peak wide spread. 659 bonds ($1.028 trillion) remain classified as "Position long" or "Attractive long" for trading.

Equity Correlation to IG Credit Spreads

Wednesday was the 10th trading day in 11, where US 10Y credit spreads correlated with US equity index price changes.

New Supply / Bond Maturities / Credit Fund outflows for April

While Walmart (WMT Aa2/AA) sold USD bonds for the first time in two years, only the new 5 year traded tighter. The 10-year WMT bond remains unchanged @ 52/10Y.

Thursday saw just one new issue in the G 250 trading /research universe.

Bank of America coming to market with BAC NC5 Perp (Baa2/BBB-/BBB+).

Our credit trading model output shows:

(1) Not many Perps out there with mid BBB ratings

(2) Not many BAC Perps (4 totaling $10.1 billion.

(3) Next call at the Perp level 01/27/27 the BAC 4 3/8 PERP.

The new Perp should be good to 6.35% according to our trading model.

According to Lipper, for the week ended April 23:

Short and Intermediate Investment-Grade Bonds: $1.14B outflow (vs. $5.74B outflow prior week)
High-Yield Notes: $1.56B outflow (vs. $1.64B outflow prior week)
Treasuries: $2.6B inflow (vs. $2.16B inflow prior week)
US Leveraged Loans: $647.8M outflow (vs. $1.48B outflow prior week)

This marks the fourth consecutive week of outflows in investment-grade (IG) retail credit mutual funds. The tightening of credit spreads over the past five trading sessions is notable, as it occurred despite no significant end-user buying during this period.

Systematic Trading Model Indicators – Friday

While US IG credit spreads continue to rally with equities and reported earnings, We are still another (-10bp) of overall credit spread tightening before our model would begin to show significantly more attractive short trading indicators.

The model maintains its "long-only" stance across its 6,200-bond, 250-issuer USD large-cap universe for the 27th consecutive trading day. Attractive short indicators remain near five-year lows, with over 75% of model indicators classified as attractive long.

Attractive Trading Sectors

Attractive Long Trading Sectors: US Regional Banks and Canadian Banks are the most attractive long trading sectors this morning within the 6,200 USD bond universe analyzed daily by our model.

Attractive Short Trading Sectors: Only Big 6 banks (8 bonds) have more than five attractive short recommendations according to the model.

Systematic Credit Indicators

Our quantitative analysis and stochastic trading algorithms are the sole drivers of identifying trading opportunities. These strategies are backtested on historical data to assess performance, pinpoint weaknesses, and generate attractive long/short trades. The goal? Achieve a minimum of ±5 basis points of credit spread widening or tightening in as few trading days as possible, minimizing volatility risk while maximizing return on assets.

Most Recent Model Trading Indicators

The trading model added the American Express (AXP A2/A-) AXP Float 04/25/29, with 9 bp of credit spread tightening Monday. This bond reached its avoid trading level within 3 days. On

Friday Sample Trading Indicators and Credit Spread Movement

Since February 24, we've published 25 secondary and new-issue trading indicators from our model:

• 9 indicators have reached their avoid-trading level.

• The remaining 16 indicators have widened by an average of 4.4 bp.

• Across all 25 indicators, credit spreads are now unchanged.

Prior long/short trading indicators

Of the 46 new-issue and secondary trading indicators published (22 long and 24 short) that reached their avoid trading level, the average credit spread movement was (+/-5.6bp).

Of the 10 long indicators issued before February 22 that haven't yet hit the avoid-trading threshold:

• Four are BBB-rated and have widened by 28.7 bp on average since being indicated.

• They currently trade at 153 bp over the UST curve, with an 8.3-year duration.

• Our model projects an average spread tightening of -34.7 bp remaining.

• Six are single-A rated and have widened by +17 bp since being indicated.

• They now trade at 110.5 bp over the UST curve, with a 10.9-year duration.

• The trading model indicates an average spread tightening of -25 bp remains.

Earnings results

Issuers reporting Wednesday (later) and this AM

Norfolk Southern (NSC Baa1/BBB+ ):

1Q Results: Flat operating earnings on lower volumes, adjusted for 2023 Ohio derailment; jury verdict ($600M settlement) will impact 2Q.
Financials: Not retaining capital, but de-levering balance sheet.
Trading Indicator: Long NSC secondary trading curve, with NSC 5.35 08/01/54 ($1B+ market cap) trading 10 bp from its attractive point.

Rogers Communications (RCICN Baa3/BBB-):

1Q Results: Slightly better YoY revenue/earnings, but disappointing subscriber growth.
Financials: Adding financial leverage despite balance sheet improvement efforts.
Trading Indicator: Short RCI secondary trading curve at tighter credit spread levels.

ENI (ENIIM Baa1/A-):

1Q Results: Revenue and operating income well ahead of expectations; guidance confirms 1.7M bbl/day production, reduced capex, and focus on de-levering and dividends.
Financials: De-levering balance sheet; cites trade headwinds from US rhetoric but not tariffs.
Trading Indicator: Long ENI USD secondary trading curve, with ENIIM 4 3/4 09/12/28 as the most attractive USD bond. ENI issues USD bonds every ~24 months.

Sanofi (SANFP A1/AA-):

1Q Results: Better than expected, affirmed 2025 guidance, filed to delist from Canadian equity/debt markets.
Financials: Re-levering balance sheet; last USD bond issuance in 2018.
Trading Indicator: No specific indicator provided; re-levering suggests potential short or neutral stance.

IBM (IBM A3/A-):

1Q Results: Revenue and operating income were ahead of expectations; Management guided lower not due to trade tariffs, but do the impact of the DOGE initiatives on consulting revenue going forward.
Financials: Re-levering balance sheet post $6.5 HashCorp acquisition in February 2025. Company is not retaining capital.
Our trading model views the IBM secondary trading curve as an attractive short trading Indicator at tighter levels.

Bristol Myers Squibb (BMY,A2/A)

Rating (A2/A)
1Q Performance: Revenue declined 5.6% YoY, but net earnings recovered to 1Q 2023 levels, signaling operational resilience. The company raised 2025 guidance, driven by slower-than-expected revenue declines in mature products like Eliquis.
Financial Performance: BMY has reduced debt in 5 of the last 6 quarters, a priority highlighted by the unprecedented simultaneous release of net debt calculations with earnings.
Trading Indicator: BMY equity is down 17.74% over the past 30 days and the equity is attractive.
Bonds with attractive valuations: BMY 5.2 02/22/34 and BMY 4 1/8 06/15/39 once the equity has recovered. The secondary trading curve is indicated as a long opportunity.

Merck (MRK,A3/A+)

Financial : Reported revenue and income beat expectations, consistent with traditional pharma reporting. However, 2025 guidance was lowered due to anticipated expenses from U.S. trade tariffs, aligning with similar moves by two other issuers on the same day.
Debt Reduction: MRK was deleveraging its balance sheet as of December 31, 2024.
Trading Indicator: The Merck secondary trading curve is attractive at wider credit spreads, suggesting potential value in its bonds.

Gilead Sciences (GILD, A3/A):

1Q Performance: Mixed results with earnings beating expectations, but product line revenue fell short of analyst estimates, indicating uneven performance across its portfolio.
Balance Sheet: No 1Q balance sheet data released yet; GILD will provide this in its 10-Q filing next month. Per the 12/31/24 balance sheet, GILD was increasing net debt quarter-over-quarter, suggesting a leveraging trend.
Trading Model Indicators: The GILD secondary trading curve is viewed as an attractive short trading indicator at slightly tighter credit spreads.

XCEL (XEL, Aa3/A+ )

1Q Results: Underperformed, but 2025 earnings guidance reaffirmed. No impact from US tariffs.
Financials : Net debt increased in 12 of the last 16 quarters, tied to growth in Northern States Power service area.
Model Trading Indicators: Trading model views XEL's secondary trading curve as an attractive short opportunity. However, none of the 77 outstanding XEL bonds have a market cap of $1 billion, so no specific bond is indicated.

PG&E (PCG,Baa1/BBB):

1Q Results: Revenue and earnings slightly missed expectations, but 2025 earnings guidance reaffirmed. Minor tariff impact ($100M for electric transformers).
Financials: Investments in customer credit and decommissioning trusts led to negative cash flow and an expanding balance sheet.
Trading model Indicators: Trading model shifted to an attractive short Indicator on PCG bonds at tighter levels.

T-Mobile (TMUS, Baa2/BBB):

1Q Results: Strongest among wireless operators, but post-paid subscriber growth (1.3M) was below expectations.
Financials: Balance sheet supports $15B annual share repurchasing and dividend payments, with no capital retention but balance sheet is re-levering.
Model Trading Indicators: Credit trading model views TMUS secondary trading curve as an attractive short trading opportunity at tighter spreads.

Intel (INTC, Baa1/BBB):

1Q Results: Outperformed expectations, but 2025 earnings outlook lowered due to US trade tariffs (fifth issuer to note tariff impact on Thursday).
Financials: No longer cash flow negative but not generating cash. Balance sheet re-levering for the third consecutive quarter.
Model Trading Indicators: Credit trading model sees INTC secondary trading curve as an attractive short trading Indicator at tighter levels.

Alphabet (GOOGL, Aa2/AA+):

1Q Results: For me to detail GOOGL operating results (which were very strong) would be a waste of time.
Financials: Exceptionally robust balance sheet, described as stronger than any government globally.
Model Trading Indicator: Credit trading model views the GOOGL 1.9% 08/15/40 bond as attractive at current levels.

Nomura (NOMURA, Baa1/BBB):

4Q Results: 27% increase in operating results, announced ¥60B share repurchase program and 6% dividend increase.
Financials: Retaining capital and re-levering balance sheet, signaling intent to continue leveraging.

Credit Trading Indicator: Trading model views Nomura's secondary credit trading curve as an attractive short trading Indicator at tighter credit spreads.

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. Empirasign and Curve Publishing, and their affiliates, nor the authors of this report assume any 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.