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Tue, April 29, 2025

Systematic Credit and Equity G-250 Trading Recap and Indicators for April 29, 2025

Good morning! No significant macro issues are impacting credit markets this AM. Had someone told me that Alphabet (GOOGL), Philip Morris (PM), Keurig Dr. Pepper (KDP), Procter & Gamble (PG), Northern States Power (XEL), and two other top global borrowers were selling USD bonds on the same day, I would have asked: How much of a discount (given the number of large issuers and market conditions), and how much was issued (guessing upwards of $30 billion)? Surprisingly, on Monday, there was no discount on the $13.375 billion of new supply from seven of the world's 250 largest corporates. Alphabet is also selling €4Y and €20Y bonds this morning in Europe, which is what we initially expected when writing about foreign capital flows over the past 3 months,

The outcome was as expected for 3 of the 19 total deals sold, where issuers had a market cap above $750 million: underwhelming. Credit markets widened, while equity markets barely closed above breakeven, ending a five-day streak of modestly to occasionally strong USD credit spread tightening.

On the macro front, headlines about U.S. tariff breaks for automakers emerged this AM. Any market response is likely to mirror reactions to "Trump discussions with China" or "Trump will not fire Powell." Such headlines may attract marginal U.S. cash from the sidelines (still a significant portion of the $7 trillion in U.S. money fund cash) but are unlikely to draw non-U.S. funds into U.S. capital markets.

For context, approximately 1.7 million employees work for the eight automakers operating in the U.S., with 1.2 million employed by General Motors (GM), Ford (F), and Stellantis (STLA). Even including suppliers and salespeople, the U.S. auto industry employs roughly one-third the workforce of the U.S. healthcare industry (22 million).

Earnings Season

None of the world's 250 largest issuers of corporate debt reported results on Monday. Deutsche Bank (DB), HSBC (HSBC), BBVA (BBVASM), AstraZeneca (AZN), Novartis (NOVNVX), and BP (BPLN) have already reported this morning.

Key Observation: Of the 86 issuers that have reported results thus far, only 15 are non-US issuers. Non-US issuers are raising debt at a slower pace (+1.5% QoQ) compared to US issuers (+3.7% QoQ).

Monday's US IG Credit Trading:

If it wasn't a new issue, it was tough to trade on Monday. Even with the large supply calendar, trading volumes were (-10%) lower than normal. The US IG CDX spread widened by 1bp to 67.5 and cash bonds were slightly wider by (+1bp). Financials outperformed again while Electric Utilities and Energy producer bonds were wider by (+1 to +4bp) on Monday. BBB rated bonds in general underperformed single A rated bonds with BBB TMT and Telecom (single A and BBB rated) the most sold.

How to trade Earnings Season

Over the next two days, 49 issuers will report, bringing us to approximately half of the world's largest corporate debt issuers. This group typically represents the "better half" in terms of earnings quality. Definitive conclusions are expected by tomorrow night.

Trading Strategy: The model trading output continues to indicate:

Long Positions: Attractive bonds (or new supply) from issuers that have already reported results.

Short Positions: Issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is re-levering its balance sheet.

Inflation Readings and Government Bonds

Dallas Fed Manufacturing outlook survey came in at -35.8 the lowest since 2020.

  • Prices paid for Raw Materials hit 48.4 in April the highest in 5 years.

  • Prices received for finished goods reached a 14.9 reading, the highest in almost 2 years.

U.S. IG Credit Valuation

US investment-grade (IG) credit continues to be the "most attractive" for long credit indicators for the 30th consecutive trading day. See details in the Model output section below.

Equity Correlation to IG Credit Spreads

Monday was only the second trading day in the past 13 where US IG 10Y credit spreads did not correlate to US equity index price movement. We also note that the 4 major Technology (Alphabet, GOOGL Aa2. AA), Microsoft (MSFT), Apple (AAPL) and Meta Platforms (META) balance sheets have materially outperformed the underlying equity prices.

New Supply / Bond Maturities / Credit Fund outflows for April

Have you ever been invited to a "once in a special year sale" only to discover the merchandise normally was available only about once per year, but the prices and quantities were anything but special. Which of the de-levering or net cash balance sheet of Monday's issuer new bonds came at attractive prices? A: None of them. But the "scarcity value" within the Alphabet (GOOGL) and Philip Morris (PM) offerings left the GOOGL 30Y and 40Y bonds as the "most scarce" and Philip Morris 3Y FRN as the "least overpriced" issues on Monday.

Walmart (WMT, Aa2/AA) new supply from last week, continues to underperform. If spreads are going to tighten further, the Walmart supply will be the largest new index constituents and will ultimately perform.

We have seen -$25 billion of April outflow from retail credit funds and ETFs, $67 billion of new G – 250 supply and $97 billion of G – 250 USD coupon payments and bond retirements. Normally that would lead to credit slight credit spread tightening, and that is exactly what we have seen.

Systematic Trading Model Indicators – Tuesday

After 5 successive days of spread tightening we saw spreads move slightly wider after the majority of the new issue calendar failed to trade well after some aggressive pricing on Monday We are still another (-9 to -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 30th consecutive trading day. Attractive short indicators remain near five-year lows, with over 73% of model indicators classified as attractive long.

Attractive Trading Sectors

Attractive Long Trading Sectors: US Regional, UK 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: None

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

This AM the credit trading model Philip Morris (A2/A-) PM Float 04/28/28 and the Alphabet(Aa2/AA) GOOGL 5 1/4 05/15/55 +62/30Y owing to what the model typifies as "scarcity value" where an issuer brings new supply on average 1 time per year and less. The scarcity value (according to our trading model) historically has added over (-2bp) of tightening from the stochastic model output based on historic trading of underlying secondary bonds.

Monday Sample Trading Opportunities and Credit Spread Movement

Since February 24, we've published 27 secondary and new-issue trading indicators from our model:

• 11 indicators have reached their avoid-trading level.

• The remaining 16 indicators have widened by an average of 4 bp.

• Across all 27 indicators, credit spreads are -1bp.

Prior long/short trading opportunities

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 recs issued before February 22 that haven't yet hit the avoid-trading threshold:

• Four are BBB-rated and have widened by 25 bp on average since being indicated.

• They currently trade at 156 bp over the UST curve, with an 8.3-year duration.

• Our model projects an average spread tightening of -30.7 bp remaining.

• Six are single-A rated and have widened by +16.3 bp since being indicated.

• They now trade at 108.6 bp over the UST curve, with a 10.9-year duration.

• The trading model indicates an average spread tightening of -21.4 bp remains.

Earnings results so far this AM

United Parcel Service (UPS, Ba1/BBB-)

HSBC Holdings (HSBC, A3/A- senior non – preferred rating)

  • 1Q Results: Revenue fell by (-15%) YoY; operating income down (-25)% which both beat analyst expectations. Management reaffirms 2025 lending income guidance but is closing down several I – banking teams worldwide. 1Q fee income, rose by 3% to $3.3 bil.

  • Financial Position: HSBC (HSBC) has one of the strongest bank balance sheets in the world with over 15% CET 1 capital, a growing deposit base of over $1.75 trillion and $165 billion more cash than debt. Loan quality remains strong regardless of Chinese economic outlook. HSBC also announced a $3 billion share buyback this am.

  • Model Trading Indicators: There are 16 attractive USD HSBC (HSBC) bonds according to our trading model. Since there is a better than 50% chance that HSBC sells new debt on the next 10 trading days, the model sees the HSBC Float 03/04/27 DM 99 as the most attractive HSBC attractive long trading Indicators.

Deutsche Bank (DB, Baa1/BBB Sr. non – preferred rating)

• Deutsche Bank reported 1Q revenue and earnings that exceeded all expectations and were the highest 1Q results in 14 years. Management was cautious in raising 2025 earnings guidance and forecasted that the company's current 5-year high.

• Financial Position: Deutsche Bank has more cash than debt, a 13.8% CET 1 capital ratio, improving loan book, and stable deposit base. Yes, the Bank's financial profile has improved considerably over the past 5 years, but this is not a BBB bank. Deutsche Bank's financial profile (and now profitability) exceeds several banks rated single A.

• Model Trading Indicators: There are 17 attractive USD DB bonds according to our trading model. However, Deutsche Bank has two perp issues (DB 6 PERP, DB 7 1/2 PERP) which are both callable in 2025, with the DB 6 Perp callable tomorrow. Hence, our trading model will wait 1 day to see if new DB$ supply is announced prior to identifying the most attractive Deutsche Bank secondary bond.

BBVA (BBVASM, Baa2/BBB+ Senior non – preferred rating)

  • 1Q Results: BBVA reported 1Q results that 17% on an operating basis. This is one of the fastest growing bank in the world owing to management acquisition and one of the best user technology in the world leading to 60% + operating margin. CET 1 capital rose to 13.1% in the quarter and management expects capital to remain over 13%.

  • Financial Position: BBVA is modestly growing net debt (+3% to 5% per year). At the sametime, 5Y dividend growth is 22% which is roughly the same as revenue and earnings growth over the identical time period.

  • Model Trading Indicators: There are only 4 USD BBVASM Senion non – preferred bonds in circulation. Hence, our trading model does not see any attractive BBVA short trading opportunities. The model does recognize a long position in the BBVA SM equity Secondary trading curve now an attractive short at slightly tighter credit spreads. 5.56% dividend yield and 20% dividend growth rate.

Astra Zeneca(AZN, A1/A+)

  • 1Q Results: Revenue grew 7% YoY; after tax earnings rose 30% on lower tax charges. Management reaffirmed single digit revenue and earnings growth and "commitment" to US despite trade tariffs.

  • Astra Zeneca is again using balance sheet cash to grow dividend and share repurchases ($3.88 billion 1Q 2025) and AZN balance sheet again is re-levering.

  • Model Trading Indicators: There are 21 bonds in the current AZN secondary trading curve. The 2029 to 2045 maturities trade the tightest to US treasuries. Our credit trading model would see those bonds as an attractive short trading indicators (-5 to -10bp) tighter from current trading levels. At the same time, the credit trading model sees AZN common as an attractive long trading indicator.

Novartis (Novartis (NOVNVX, Aa3/A+)

  • 1Q Results: Revenue grew 12% YoY; after tax earnings rose 34% on strong product sales and operating leverage. Management raised 2025 revenue and operating earnings guidance as well stated they were prepared for US tariffs later in the year should they materialize

  • Finance/balance sheet: Novartis generated $3.6 billion in total operating cashflow during Q1. The company spent $8.0 billion on share repurchase and dividends in the quarter. The Novartis AA rated balance sheet is again re-levering.

  • Model Trading Indicators: There are 12 bonds in the current USD NOVNVX secondary trading curve. The NOVNVX 4.2 09/18/34 and NOVNVX 3.1 05/17/2727 would be the best attractive short trading indicator roughly (-9bp) tighter from current levels.

BP (BPLN, A1/A+)

  • BP reported 1Q revenue fell 2% and operating cash flow that fell by 44% YoY The change in supply/demand equation for global energy and the volatility of the US dollar had material impact on BP first quarter results. With the outlook for the demand for oil continuing to drop, the company cut its forecast for revenue, cash from operations and share repurchases.

  • Financial Position: BP generated $2.8 billion of cash from operations in 1Q 2025. After Capex and investments BP registered a cash outflow of (-$3.2 billion) and then repurchased BP equity and paid dividends of (-$3.1 billion). The net result is that the BP balance sheet is re-levering quicker than any non – US financial position. The company also reiterated another $750mm in additional share repurchase despite the negative operating cashflow.

Model Trading Indicators: Our credit trading model flips from attractive long secondary BP to an attractive short trading indicator with only 7 of the 19 liquid USD BPLN bonds not considered overvalued by our trading model. The credit trading model sees the BPLN 2.721 01/12/32 as the most attractive short indicator inside a bid of 60/10Y.1Q Results: Revenue grew 12% YoY; after tax earnings rose 34% on strong product sales and operating leverage. Management raised 2025 revenue and operating earnings guidance as well stated they were prepared for US tariffs later in the year should they materialize.

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.