Systematic Credit and Equity G-255 Trading Indicators for July 17, 2025
Systematic credit trading overview and model indicators
The June 2025 PPI core number (2.3% YoY, 0.0% MoM) initially drove a rally in U.S. Treasury (UST) prices, up to ¾ point at the 30-year level. However, comments from Federal Reserve Governors Bostic and Williams led to a decline in UST prices throughout the day. Corporate credit trading volume was slightly above average. JPMorgan (JPM) and Citigroup (C) issued attractively priced lower-tier bonds.
Global Q2 Corporate Earnings Trends
Of the 255 largest global corporate debt issuers, 17 reported June 2025 results. Seven issuers either hold more cash than debt or are reducing net debt. Only DNB Bank (DNBNO, A2/A-, Attractive Short) and Swedbank (SWEDA, A3/A-, Attractive Short) shifted from deleveraging to re-levering, per the systematic credit trading model. While 70 additional observations are needed to confirm a trend, the re-leveraging trend among large corporate balance sheets, observed over the past six quarters, appears to be continuing and may be accelerating.
Bank net debt levels are expanding due to increased shareholder returns through share repurchases (tax-efficient) and dividends (less tax-efficient), alongside changes in global bank regulatory reserve requirements. CET1 ratios for most banks have declined by 50–100 bp in quarterly reports. Bank equities are significantly outperforming bank corporate bonds, with U.S. investment-grade (IG) credit spreads and U.S. equity prices showing an 80% directional correlation over the past 34 years. However, the magnitude of these movements has shifted markedly over the last two years, driven by large corporates using balance sheets to fund share repurchases and dividends.
Short Corporate Bonds, Buy Equity
As management of major corporate borrowers prioritizes share repurchases and dividend growth (exceeding 10% annually), U.S. equity returns have reached approximately 10% YoY and 6% YTD. U.S. IG credit spreads are slightly wider YoY, while U.S. 10-year interest rates are higher YoY. Corporates are increasingly using balance sheets to support equity valuations and shareholder payouts, where returns are 3x–5x higher than in bonds, with less than 2.5x the volatility.
Example: JPMorgan (JPM, A1/A-, Attractive Short)
JPMorgan's equity returned 31% over the past 12 months and 20% YTD. The company spent $55 billion on share repurchases and dividends in the 12 months ending June 30, 2025, a 17% increase from the prior year. In contrast, the JPM 5.294% 07/22/35 bond returned 5.45% from July 15, 2024, to July 14, 2025, and was among the best-performing USD corporate bonds. JPMorgan's net debt rose from a net cash position to nearly $100 billion over the past year, primarily to fund shareholder returns. The trading model indicates shorting JPM corporate debt (except new issues) and buying JPM equity on price dips, supported by its financial results.
Criteria for Shorting Large Issuer Credits
The trading model identifies short opportunities for issuers meeting these conditions:
Re-levering balance sheet.
"Attractive Short" Indicators based on 52-week valuation.
Equity price growth below 0.5% per month.
Corporate bond fund outflows.
This Systematic Trading Strategy has a 98.5% success rate.
Please let us know if you would like to see details on any of information presented above.
G-255 Issuers reporting results Wednesday
United Airlines Holdings Inc (UAL Ba1/BBB- attractive long) Reported
Alcoa Corp (AA not a G -255 issuer) Reported
Kinder Morgan (KMI Baa2/BBB attractive short) Reported
G-255 Issuers reporting results Thursday
Nordea Bank (NDAFH, A3/A attractive short) Reported
Swedbank (SWEDA, A3/A- attractive short change from 1Q) Reported
PepsiCo Inc (PEP A1/A+ attractive short) Bef-mkt Q2 25
Abbott Laboratories (ABT Aa3/AA- attractive long) Bef-mkt Q2 25
Elevance Health Inc (ELV Baa2/A attractive long) 06:00 Q2 25
Marsh & McLennan (MMC US A3/A- attractive short) Bef-mkt Q2 25
US Bancorp (USB A3/A attractive short) Bef-mkt Q2 25
General Electric Co (GE A3/A- attractive long) Bef-mkt Q2 25
Fifth Third Bancorp (FITB Baa1/BBB+ attractive long 06:30 Q2 25
Systematic Trading Model Insights and Strategy
The Systematic Trading Model evaluates over 6,000 bonds daily. Currently, 803 bonds are within 20% of their 52-week tight or wide spread levels, 44% above historical averages. Over the past week, bonds trading near 52-week tight spreads have vacillated with earnings results.
Current Trading Allocation Strategy
57% Long: Focus on undervalued, deleveraging bonds.
23% Short: Target overvalued bonds in re-levering sectors.
20% Front-End Allocation: 75% in floating-rate notes maturing within 3 years.
Performance: Of 131 long/short trades in 2025 (marked to market via TRACE), 92% achieved ±5 bp targets, averaging ±7.55 bp per trade.
Recent Activity: Short position additions paused on July 2, 2025, due to non-replaced long positions from late June to early July. Between June 30 and July 16, 2025, 13 long trade indicators reached "avoid" levels, shifting the long/short basket to a "more short" stance. Two new attractive long new-issue indicators were published today.
Sector Trading Indicators
Long Opportunities:
Yankee Banks (especially floating-rate notes).
Single A TMT.
Short Opportunities:
U.S. Big 6 Money Center Banks.
Single A Healthcare.
Single A and BBB Industrials (re-levering, tight spreads).
BBB TMT (larger tech issuers re-levering).
Risk Management
The model avoids adding risk to G-255 issuers scheduled to report results within 30 days, complying with global regulatory requirements for reporting material events.
Inflation, Economic Data, and Interest Rates
June final demand producer prices were unchanged MoM after rising 0.3% in May, according to the Bureau of Labor Statistics.
As there are so many headlines this AM relating to both Fed speakers who are not convinced that inflation is moving lower and Donald Trump's efforts to remove Fed Chair Powell, UST markets are "decidedly" unchanged.
Same-store sales, rose 5.2% in the July 12 week compared to a year earlier, Johnson Redbook says.
Month-to-date sales through July 12 rose 5.2%
July sales expected to be up 5.7% over the same month of the previous year
Wednesday's U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +8% above average
-G-255 Issuers: 97 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 77% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -5% below average
-G-255 Issuers: 17 of the top 25 traded bonds accounted for 61% of top 25 issuer volume and 54% of total TRACE volume.
Market Movement
U.S. CDX Index: Unchanged @ 52 bp
U.S. IG Cash Spreads: Ranged from +1bp wider to -3bp tighter; BBB US Industrials outperformed while no sectors were more than + 1bp wider.
CDX HY Index: unchanged @ 107.20 (per Bloomberg)
HY Cash Bonds: BB energy bonds underperformed and no sectors rose.
High-Yield Activity
- End User bought $ 400 million of HY bonds.
Most Bought HY Bonds
- Carnival Corp (CCL Ba3/BB+ attractive long)
Most Sold HY Bonds
- Viper Energy (VNOM Ba1/BBB-)
Investment-Grade Activity
- End users net bought $2.1 billion of IG bonds Wednesday.
Most Sold Sector: Consumer Staples.
- Conagra Brands new issue (CAG, Baa3/BBB-)
- Kraft Heinz (KHC Baa2/BBB attractive short)
Most Bought Sector: BBB TMT
- T - Mobil TMUS Baa2/BBB attractive short)
- Intel (INTC Baa1/BBB attractive short)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers Overall model indicators 188 bonds ($279.5 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
1388 bonds ($1.33 trillion) are considered overvalued by the stochastic credit trading model with 729 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $723.3 billion in overvalued market capital across 289 bonds, with 142 short indicators.
BBB TMT $214.5 billion in overvalued market capital across 129 bonds, with 47 short indicators.
Single A and BBB industrials $151.6 billion in overvalued market capital across 122 bonds, with 68 short indicators.
Single A Healthcare $179. 1 billion in overvalued market capital across 122 bonds, with 70 short indicators.
Issuer News
Walmart Inc. (WMT Aa2/AA attractive long) is eliminating hundreds of store-support roles to streamline its organizational structure. According to a memo viewed by Bloomberg News, the company is phasing out the market coordinator position, a corporate role that supports market managers overseeing approximately 12 store managers each. "We're simplifying our market support structure, reducing touchpoints and friction for our store associates," wrote Cedric Clark, Executive Vice President of Store Operations at Walmart US, in a memo dated Wednesday, July 16, 2025.
Electricite de France SA (EDF, Baa1/BBB attractive long) is exploring the sale of an approximately 50% stake in its North American renewable power business, valued at around €2 billion, according to sources familiar with the matter. EDF Chief Executive Officer Bernard Fontana stated that the company may divest assets to prioritize investments in nuclear power, grids, and renewable projects in France. An EDF spokesperson confirmed that EDF Power Solutions is considering opening the capital of certain entities, particularly in North America and Brazil, to support the growth of its project portfolio.
SoftBank (SOFTBK Ba3/BB+ attractive long) Klook, a travel app backed by SoftBank, is reportedly exploring an initial public offering (IPO) in the US that could raise up to $500 million, according to sources with knowledge of the matter. The company is collaborating with financial advisors and may confidentially file for the IPO soon. Approximately 70% of Klook's user base consists of younger travelers, the company reported.
Alcoa Corp (Ba1,BB) reported that tariffs on aluminum imports from Canada cost the company $115 million in Q2 2025. To mitigate additional tariff expenses, Alcoa redirected Canadian-produced aluminum to customers outside the US. Chief Executive Officer William Oplinger noted that US customers are bearing the cost of these tariffs, stating, "They are paying significantly more for aluminum in the United States than anywhere else in the world."
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 50% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: U.S. credit moves back to overvalued based on output from our credit trading model.
2025 credit spreads: Are wider YTD and YoY
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices reverted to moving in identical direction for 55th trading day in 63. While credit spread movement has an 80% correlation to the equity price movement, the magnitude of these moves has changes markedly over the past 2 years. This owes to the world's largest corporates using balance sheet to fund equity share repurchase and dividend payout
New Supply, Bond Maturities, and Credit Fund Inflows for July
We saw both JP Morgan (JPM A3/A-) and Citigroup (C Ba1/BB-) sell lower capital structure bonds on Wednesday.
The $4 billion JPM subordinated bond was very attractively priced @ 112.5/10Y (1.275x to the J JPM 5.572 04/22/36.
Citigroup printed $1.7 billion of 6 7/8 nc 5Y Perpetual bonds which came at 25 bp discount to the C 6.95 PERP
We expect to see more US bank supply over the remainder of the week as we wait to see Thursday's retail credit fund flows.
Investments in US-listed fixed income exchange-traded funds expanded 42% in the past week for the 14th straight week of inflows.
Net inflows to ETFs totaled $6.47b in the week ended July 15, 2025, including the effect of leveraged funds, compared with $4.54b the prior week
Government bond ETFs inflow rose by $1.42b to $2.61b
Corporate bond ETFs moved to inflow by $1.85b to $1.05b
Investment-grade ETFs expanded by $2.44b to $3.77b, and high-yield ETFs expanded by $1.05b to $1.09b
Net inflows totaled $190.2b year-to-date
IShares 20+ Year Treasury Bond ETF had the biggest inflow, of $917.6m
IShares iBoxx $ Investment Grade Corporate Bond ETF had the biggest outflow, of $1.16b
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short indicators 729, 64 higher than Wednesday but less than the beginning of the month.
74 attractive long indicators: 4 more than Wednesday.
Systematic Portfolio Trading Model Indicators:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for 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 75% long hurdle, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
-12 long trades have reached their avoid trading levels and thus far, have been replaced by just 2 new issue indicators
Systematic Credit Trading Strategy July 17, 2025
Closed Positions: The model exited the Broadcom (Baa2/BBB) AVGO 5.2 07/15/35 on Wednesday
Enter New Longs: Today the model adds:
Citigroup (Ba1/BB+) C 6 7/8 PERP 07/23/25
JP Morgan Subordinated (A3/A-) JPM 5.576 07/23/36
Monitor 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 75% 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.
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 individual bond trades based on trading strategy
This morning the Our trading model sees the following new issues as attractive for the long/short basket trade:
Citigroup (Ba1/BB+) C 6 7/8 PERP 07/23/25
JP Morgan Subordinated (A3/A-) JPM 5.576 07/23/36
The model adds the JPM Sub 10Y even though the issuer is re-levering owing to the discount to JPM trading curve that the bond was issued.
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 16, 2025)
Total Trades: 131 (1% of total indicators).
Performance Summary:
Long Indicators: 92/100 reached avoid-trading levels, tightening by -9.59 bp.
Short Indicators: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 8 tightened by -2.38 bp.
Remaining Shorts: 4 tightened by -13.25 bp.
Average Spread Movement: ±7.55 bp in the indicated direction.
Success Rate: 92% of indicators reached avoid-trading levels which is normal.
Average trade holding period: (22 trading days) + 17% 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.