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Mon, June 2, 2025

Systematic Credit and Equity G-250 Trade Indicators for June 2, 2025

End of the Month Market Update: Credit Spreads, Equity Valuations, and Corporate Debt Trends

"The more things trade, the more things stay the same!" Something like that. We saw strong EOM trading volume but no real movement in credit valuation or US equity prices Friday. Our stochastic trading model does not speculate as to why. But those were unusual end of month volumes. More strange? The UST 10 year rose +25bp in YTM in May. The LQD return was 40bp for the month and credit spreads tightened (-20 to -25bp). We read from strategists and analysts (and PLEASE don't confuse model output with credit market commentary or opinion) that the declining credit market volatility and trading is "returning to normal."

Return to normal what? As we noted Friday, the number of corporates around the world that have more than $15 billion of tradable debt or more now stands @ 254 with roughly $19 trillion of overall debt. JP Morgan has over $350 billion of debt outstanding. There are about 66 global financial issuers (only 22 of them are domiciled in the US) with $10.6 trillion of total debt outstanding. The remaining 188 non – financial issuers (110 of them domiciled in the US) have about $7.8 trillion of debt. Problem is, not all of them report results in March or September and not all of them report in January and June. Personally, I think the issuers do this just to confuse me.

Simple perspective (as we elaborate in other parts of the report) if the bond you are looking to trade isn't in the top 254 issuers of corporate debt, you are probably not going to trade much of it. Our trading model is designed to capture all of the balance sheet and trading movement worldwide in all of the most liquid issuers in the world.

To use yet another movie line "Unit, Corp, God, Country. It's our code Sir," " Leverage, Valuation, Sector, Bond" That's our code. We run 32,000 + calculations and update every issuer daily to get trade indicators overnight. The key to the output is the time series data for every level (Balance sheet leverage, Credit Spread variance, directional indicator and equity price). Since there is only a .2% chance of default for any of the 254 issuers, all the model does is calculate series of volatility measures based on credit rating, maturity, coupon rate and of course balance sheet leverage. The outcome is already a known number. All we are trying to do is shorten the holding time and until the bond reaches its avoid trading level and minimize mark to market volatility.

Typically the model will generate large "attractive short" and "attractive long" indicators (where bonds are trading at extremes) of 12.5% of the entire $6.5 trillion trading universe 2 – 4 time per year. As we have written, (too often) the trading model produced 1,121 attractive short trading recs ($1.9 trillion) on November 12, 2024 and similarly 828 attractive long trading recs ($1.514 trillion) on April 10, 2025. Follow the model's indicators and your performance relative to the market in terms of total return and Sharpe ratio are numbers (that we have been told too many times) are "hard to believe." But they are true. Hence, why we are publishing.

The key to trading the model indicators are: (1) Stick with the G-254 (its been as large as 272) and (2) the corporate bond market (both HY and IG) trade "based on the calendar (earnings and new issue, which are related)". (3) "Let the trade come to you." The outcome is known quantity and can be stochastically calculated. It's not a question of "if" it's a question of "when."

What is the model output indicating this morning? A: There is no better time of year to visit the UK or Europe. Come early August we will be in the middle of 2Q earnings results and the weather will be less cooperative.

Another question I have been getting for 25 years. How did we come up with the tolerance levels to create the 5 categories of bond valuation (Attractive long, Attractive short, Position Long, Position Short and Avoid)? Back in the early '90s Fidelity Management and Research wanted a risk management tool that we could use to run $500 billion in corporate credit globally. Building that tool (and back testing outcomes) given the lack of the technology we have today required investment skill and knowledge that could only be harnessed at a firm like FIDO. Today, it's unlikely a multi-factor, multi-hierarchy model such the one we are constantly trying to improve could a number of bond trading minds that are comfortable with finite math and knowledge of the outcome. I will leave it right there.

As to the actual long/short algorithms? Need another movie line. "I could tell you, but then I'd have to kill you."

But given the narrow spreads set in early November of 2024 and the wide levels we hit in April of this year US credit valuations are at present "stuck" near fairly valued for the time being.

Inflation, Economic Data, and Interest Rate Outlook

"Federal Reserve Governor Christopher Waller expects interest-rate cuts later this year due to tariffs boosting unemployment and temporarily increasing inflation." That's according to Bloomberg.

Only one problem. That's not what Waller actually said.

"I support looking through any tariff effects on near term-inflation when setting the policy rate," Waller told a gathering in Seoul, South Korea. "If tariffs settle in the lower end of the range of possibilities and "underlying inflation continues to make progress to our 2% goal" with a still "solid" job sector, "I would be supporting 'good news' rate cuts later this year," Waller said.

Seldom do say anything like this. The Bloomberg story is "completely off the rails."

Let us know when underlying inflation "continues to make progress towards 2%."

US 10Y UST yields rose by 25bp in May but are still (-17 bp lower on the year). European government rates were slightly lower with the exception of Germany

Earnings Season Insights

We saw the last of Canadian Bank earnings reports on Thursday. We have completed tabulating cash flow and dividend info for all 6. We hear from Hewlett Packard Enterprises (HPE) tomorrow, and Broadcom (AVGO) on Thursday

Canadian bank earnings for the quarter ended April 30, 2025, were reported last Thursday. Earnings grew approximately 5% year-over-year (YoY) on revenues up 12%. Credit charge-offs increased 26% YoY, and net debt on Canadian bank balance sheets rose 9.5% quarter-over-quarter (QoQ) to $195 billion, a five-year high. Shareholder returns surged 45% YoY, funded by excess liquidity.

For non-U.S. banks, net debt across 40 reporting banks fell by $86.5 billion, with cash nearly matching debt levels and $25.16 trillion in deposits. We await Q1 cash flow statements for further analysis and will provide weekly breakdowns of non-U.S. bank balance sheets and shareholder returns

Friday's US Investment-Grade (IG) Credit Trading

Trading volume was 58% above average, totaling $68 billion. May 2025 month-end volumes were 7% higher than May 2024 (which included Memorial Day) but lower than most months since last summer, except for Thanksgiving and year-end 2024. Summer months (June, July, August) and December typically see 21% lower trading volumes compared to other months.

G-254 issuers accounted for 90 of the top 100 traders last week, representing 95% of top 100 issuer trading volume and 72% of total volume on TRACE.

Market Movement

  • U.S. CDX Index: Unchanged at 56 basis points for the third consecutive day.

  • U.S. IG Cash Spreads: Unchanged on Friday.

  • Sector Performance: Energy and TMT sectors widened slightly, while most sectors remained stable in credit spreads despite high trading volume.

Top net buys included JPMorgan Chase (JPM), HSBC Holdings (HSBC), Citigroup (C), and Morgan Stanley (MS). Our trading model views JPM and MS secondary bonds as moderately attractive for short trades (not yet at optimal levels) and HSBC and C as attractive for long trades.

Top net sold issuers were Apple (AAPL), AT&T (T), and Pfizer (PFE), all considered attractive for long trades at wider spread levels by our trading model.

Attractive trading sectors

Long Opportunities

  • None – there are only 258 bonds considered undervalued ($380 billion) and 65 considered attractive long trading indicators ($88.6 billion) by our trading model

Short Opportunities

  • U.S. Big 6 Banks (All Ratings): $600.5 billion in overvalued market capital across 230 bonds, with 50 short indicators.

  • Australian Banks: $70.2 billion in overvalued market capital across 63 bonds, with 18 short indicators.

  • BBB TMT: $195.3 billion in overvalued market capital across 110 bonds, with 32 short indicators.

Issuer News over the weekend

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  • . Delta Air Lines (DAL): CEO Ed Bastian projects a modest demand increase in the second half, following earlier U.S. market and leisure travel softness. DAL is an attractive long trading indicators at wider spreads per our trading model.

  • Sanofi SA (SANFP): Acquiring Blueprint Medicines Corp. for $9.1 billion to bolster its rare immunological disease portfolio. SANFP is an attractive short trading indicator at tighter spreads per our trading model.

  • HSBC Holdings Plc (HSBC): Announced exit from its U.S. business-banking portfolio after a strategic review.

U.S. IG Credit Valuation and Spreads

Our trading model, based on stochastic finite mathematics with over 95% probability outcomes, indicates U.S. investment-grade (IG) credit is nearing "Fairly Valued." Recent new issue trades in Walmart (WMT), Apple (AAPL), and Citibank (C) show limited credit spread movement and below-average trading volume. Notable trading opportunities include a short in November 2024 and a long in April 2025.

Global Equity Correlation to IG Credit Spreads

U.S. IG credit spreads aligned with U.S. equity markets on 17 of 20 trading days in May and 52 of 61 trading days year-to-date. The S&P 500 is up approximately 1% in 2025, while credit spreads are 1–15 basis points wider. Over the past 12 months, the S&P 500 gained 14%, while credit spreads widened year-over-year. The LQD ETF is nearly flat in price, with a 5% coupon return, reflecting corporate balance sheet leverage and new USD supply from major issuers.

New Supply / Bond Maturities / Credit Fund outflows for May

No new supply was issued on Friday (month-end). In May 2025, 42 G-254 issuers sold $94 billion in new supply, while 44 G-250 issuers sold $91 billion in GBP- and EUR-denominated bonds in Europe.

Systematic Trading Model Indicators and Trading Strategy - Monday

This morning's model generated:

  • 294 attractive short indicators, 27 more than Friday AM.

  • 67 attractive long indicators, 10 fewer than Friday.

  • Of over 6,000 bonds in our research universe, 363 are trading near their 52-week tight or wide spread levels, 34% below normal and 35% below the threshold for adding short positions.

Systematic Trading Strategy for Monday June 2

Trading Strategy: Add long positions in de-levering new issues with attractive valuations. Delay short positions until short indicators reach 400 and credit spreads enter the "overvalued" range.

Systematic Credit Indicators

Systematic credit trading Our 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 managing volatility risk.

Most Recent Model Trading Indicators

Sample Trade Performance Since January 4, 2025: Of 110 (1% of total model indicators):

  • 61/83 long indicators reached avoid-trading levels, tightening by -10.54 bp.

  • 24/27 short indicators reached avoid-trading levels, widening by +5.3 bp.

  • 22 remaining longs widened by +2.68 bp.

  • 3 remaining shorts tightened by -3 bp.

  • Average spread movement: ±6.45 bp in the indicated direction.

  • 78% of indicators reached avoid-trading levels (12% 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.