Systematic Credit and Equity G-250 Trading Indicators for May 27, 2025
Risk assets opened this morning in line with Friday's close, driven by cash inflows into US equity futures and ETFs. This follows the White House's decision to delay most tariffs until July and the EU's commitment to "fast-track" trade negotiations with the US—though the details remain unclear. As earnings season winds down this week, May economic data won't arrive until late next week.
Friday's abbreviated credit trading session left most credit markets wider or lower (depending on credit rating), but our credit trading model's readings remained largely unchanged over the weekend. The world's largest corporate debt issuers continue to issue more bonds outside the US than in recent years. Notably, 55% of the top 250 global corporate debt issuers are re-leveraging their balance sheets, with most funds raised in Q1 2025 used for shareholder returns through dividends or tax-efficient share repurchases.
Global equity returns remain positive over the past 12 months, while corporate fixed income spreads have underperformed. We frequently receive questions about US Treasury (UST) prices and interest rates. Like US equity prices, historical correlations with significant predictive power are not holding in 2025. Despite elevated 1-year and 5-year inflation expectations, CPI, PPI, and core inflation have not risen accordingly. The US government bond market remains the top performer year-to-date among mature economies, despite the highest inflation expectations.
The S&P 500 is trading at 28x earnings, a level unseen since 1999, excluding the 2020–21 COVID market and the 2008–09 financial crisis. Interest rates are not guaranteed to decline, and potential inflation could erode earnings growth, which is unlikely to match the 10% annual rate seen in 2023–24 over the 2025–26 period. Meanwhile, US corporate balance sheet leverage and shareholder returns are outpacing revenue growth (currently at 5%) by more than 2x.
Our credit trading model indicates that US corporate credit is slightly overvalued, but short opportunities are limited, and attractive new US bond supply is scarce. Have we seen this before? Perhaps as often as "The Longest Day" aired over Memorial Day weekend.
How Will the Market Play Out?
Our trading model, which we've published for years, typically identifies 2–4 credit cycles annually where valuations hit peaks and troughs. For example, last November, the model flagged over 1,100 attractive short opportunities before credit spreads widened by 72 basis points by April 10, followed by over 800 attractive long indicators. With 55% of major issuers currently re-leveraging and prioritizing shareholder payouts amid lower earnings, it's unsurprising that corporate spreads are only modestly overvalued.
The model is a buyer of volatility. While equity prices, reported earnings, new bond supply, and economic data influence credit spreads, spreads are not at extremes, unlike equity valuations. Historically, the correlation between stock prices and credit valuations averages 0.75, and we expect this relationship to normalize over time.
Inflation, Economic Data, and Interest Rate Outlook
This week, key data releases include April's final personal income/spending, Personal Consumption Expenditures (PCE) Price Index, core PCE, advance goods trade balance, wholesale/retail inventories, MNI Chicago PMI, and May's final University of Michigan sentiment index. ISM survey data arrives next week, but the first May inflation reading—average hourly earnings—won't be released until a week from Friday.
Earnings Season Insights
This week, earnings reports from five Canadian banks, Nationwide UK, Hewlett Packard Enterprise (HPE), Dell Technologies (DELL), and NVIDIA (NVDA) will provide insights into global markets. Additionally, non-G250 issuers AutoZone (AZO), Best Buy (BBY), Costco (COST), and Gap (GPS) will shed light on the US economy's health.
Last week's earnings revealed modest but increasing net debt at BT (BT/A), Vodafone (VOD), and Home Depot (HD). Comparable store sales for Q1 were notably weaker at Walmart (WMT), Home Depot, and Lowe's (LOW), with rising prices cited as a key factor. Toronto-Dominion (TD) and Santander UK (SANUK) reported flat year-over-year (YoY) earnings, with 30% increases in net charge-offs and stagnant loan book growth. Among the top 250 global corporate debt issuers, YoY net debt rose by $1 trillion, primarily driven by 130 US issuers.
The proportion of issuers releveraging their balance sheets remains near a five-year high at 54%. However, this trend is sector-specific. High-tech, single-A industrials, and utilities led net debt increases quarter-over-quarter, while Japanese, UK, and French banks bolstered cash and short-term investments in Q1 2025.
Friday's US Investment-Grade (IG) Credit Trading
USD trading volumes were 55% below average heading into the long holiday weekend in the US and UK. Of the top 100 issuers traded on Friday, 86 were G-250 issuers, accounting for 97% of the top 100 and 69% of all bonds traded. The top 100 issuer bonds included 46 of the top 50 corporate issuers, representing 72% of Wednesday's TRACE volume. Dealers sold $1.5 billion in IG credit, consistent with daily averages. Financials comprised 31% of traded bonds, while technology, media, and telecom (TMT) was the only sector net sold.
Market Movement
The US CDX index widened by 1.5 basis points to 59.5. US IG cash spreads widened by 2–3 basis points. Financials closed slightly wider but outperformed other sectors.
Attractive trading sectors
Long Opportunities
Yankee Canadian, French, and UK Banks: $187 billion in undervalued secondary capital across 110 bonds.
Single-A and BBB TMT: $112 billion in undervalued secondary capital across 57 bonds.
BBB Healthcare: $36 billion in undervalued secondary capital across 32 bonds.
Short Opportunities
US Big 6 Banks (All Ratings): $492.9 billion in overvalued market capital across 185 bonds, with 6 short indicators.
Single-A and BBB TMT: $273.3 billion in overvalued market capital across 148 bonds, with 25 short indicators.
BBB Energy: $58.9 billion in overvalued market capital across 47 bonds, with 10 short indicators.
Issuer News Over the weekend
UniCredit SpA (UCGIM) and Banco BPM: Banco BPM filed an appeal against Italy's market watchdog's suspension of UniCredit's bid for the lender, aiming to secure additional time to prepare a counterbid.
EU Capital Requirements Delay: The European Union postponed stricter capital requirements for banks' trading activities to the start of 2027. This marks the second delay, intended to prevent European banks, such as Deutsche Bank (DB) and Société Générale (GLE), from being disadvantaged relative to US competitors.
U.S. IG Credit Valuation and Spreads
US investment-grade (IG) remains "slightly overvalued" but remains cheaper than its trading levels over the past two years, but is improved over the past 6 week. Credit spreads are closer to their 52-week widest levels (April 10, 2025) than to their 52-week and 5-year tightest levels (November 12, 2024). We are currently near the tightest US IG spread levels (February 22) for 2025.
Global Equity Correlation to IG Credit Spreads
Increased leverage on large US balance sheets, with approximately half allocated to shareholder returns, has caused a notable lag in the correlation between US equities (approximately +5% return year-over-year) and US IG credit spreads (approximately 45 basis points wider year-over-year).
New Supply / Bond Maturities / Credit Fund outflows for May
New USD Supply This morning:
HSBC USA Inc (HSBC, A2/A-)
$Benchmark 3Y +100 Area – attractive to 74/3Y
$Benchmark 3Y FRN (June 3, 2028) SOFR Equiv – attractive to DM 82
BNP Paribas (BNP) has completed ~40% of its 2025 issuance plan
Deutsche Bank (DB) maintains 2025 debt issuance plan of €15b to €20b
In May, new G-250 supply totaled $86.6 billion, with 43% from non-financial issuers. For 2025, there have been 181 new G-250 USD issues across 455 transactions, totaling $401 billion, with 35.2% from non-financial offerings.
May G-250 supply in Europe is roughly the same amount as sold in the US.
Systematic Trading Model Indicators and Trading Strategy - Tuesday
The credit trading model lost 50 attractive short trading indicators on Friday as US Big 6 banks were (+2bp) wider at the Senior level. Just 3.5% of the entire 6,200 USD systematic trading universe is either trading at near its 52 – week tight or 52 – week wide spread. In the old days the motto was "let the trade come to you."
Systematic Trading Strategy for Tuesday May 27
With attractive long trade indicators (-20%) and attractive short trading indicators (-70%) below normal, credit spread/price movement in either direction will credit more directional trading opportunity.
Systematic Credit Indicators
Systematic credit trading uses predefined, back-tested processes and portfolio construction algorithms driven by issuer-reported data and market trading parameters. Unlike discretionary approaches, it offers replicable and auditable methods. Our model targets ±5 basis points of credit spread movement in minimal trading days, optimizing returns while managing volatility risk.
Most Recent Model Trading Opportunities
No new trading opportunities going into the long holiday weekend.
Friday Sample Trading Indicators and Credit Spread Movement
Since January 4 of this year we have published 107 trading indicators or about 1% of the total indicators from our systematic trading model
• 59 of 79 attractive long indicators have reached their avoid-trading level and tightened by (-9.05bp) on average
• 24 of 27 attractive short trading indicators have reached their avoid-trading level and widened by (+5.3 bp) on average.
• The remaining 21 long indicators credit spreads have widened by (+4.57bp) on average.
• The remaining 3 short indicators credit spreads have tightened by (-.33bp) on average.
• Across all 106 indicators, credit spread movement has been +/- 5.27 bp in the direction of those indicated.
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.