The model explained

We saw more G-255 trading indicator changes across all 5 data hierarchies on Thursday than we have seen in the past month.

G-255 Credit Trading Model Valuation: Overvalued

After declining from over 1,100 short trading indicators in September, trading model shorts bottomed in the last week of October. Overnight, the number of short trading indicators rose to 868, totaling $1.476 trillion and representing 59% of all overvalued trading capital in our 6,000-bond USD trading model.

We are down to just 2 attractive long credit sectors:

Single A TMT

BBB TMT

G-255 Equities are outperforming USD equity indexes

and the number of long indicators has declined by 40% in the past month.

Thursday Earnings Reports: Not so great — but 3 issuers are now trimming net debt. Down to 145 in total.

Kroger (KR Baa2/BBB, long credit/short equity) reported fairly miserable earnings. However, after a year of adding debt to reward shareholders, the company is now paying down debt quickly.

Hewlett Packard Enterprise (HPE Baa2/BBB, long credit/equity) reported mixed results on the revenue line and heavy reliance on the term "adjusted" when it came to operating earnings. Similar to Kroger, the focus is on the balance sheet and cash flow. HPE is now delevering.

Canadian Banks – Results from all 6 banks were more mixed but improved.

Key Takeaway – Canadian Imperial Bank of Commerce (A2/A-) and Bank of Montreal (A2/A-) saw their credit trading indicators flip to Long from Short as both banks delevered their balance sheets in 4Q 2025.

• Clearly, the Canadian banks' U.S. asset mix has helped 2025 reported results thus far.

• All of the Canadian bank share prices are at levels well above attractive entry points.

• There are only 7 Canadian bank corporate bonds that the trading model indicators currently show as undervalued.

• The Canadian bank reports, however, are perceived as positives for both the U.S. equity and credit markets.

• Asset and deposit growth is solid for all six banks.

• Net interest income growth QoQ is showing the impact of lower interest rates in Canada and the U.S.

• Loan growth is modest, exactly as expected in a maturing cycle.

• Non-interest income growth is accelerating.

• Notably, 2 of the 6 banks are not delevering while CET1 ratios remain well above 13%.

• G-255 Credit Trading Sector Indicators and Thursday Credit Trading

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Mutual fund credit flows were positive after last week's outflow but still not enough to move any G-255 credit market trading indicators. Job data continues to be negative with the exception of weekly jobless claims. Credit is now overvalued per the G-255 stochastic trading model. Percentage trade indicators have remained unchanged for a 31st consecutive trading day. We have not yet seen sufficient movement in valuations (equities or credit) or in incoming/outgoing ETF and mutual fund flows to trigger a new trading allocation from the model.

• Top traded IG G – 255 issuer: Broadcom (A3/A- long credit/equity) unchanged to (-1bp) Thursday

• Top Traded HY G – 255 issuer: Celanese (CE Ba2/BB long credit/equity) (-2 to -10bp) Thursday

Key Trading indicator economic results:

• Reported jobless claims for the week ending November 29 were 191K or – 35K from the same week in 2024.

• The 4-week moving average of weekly jobless claims fell -4.25K to 214.75K

• Challenger, Gray & Christmas reported 71,321 job cut announcements in Nov.: 1,170,821 year-to-date. Job cuts in November have risen above 70,000 only twice since 2008: in 2022 and in 2008," said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

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G-255 Credit Market Valuation and New G – 255 Supply December 5

On a Risk/Reward basis, High Yield bonds have far outperformed Investment Grade in 2025

• UST 10-Year Rates: Down -7 basis points (bp) year-over-year (YoY) and -46.3 bp year-to-date (YTD). Spreads reached their tightest point of the year on Friday, February 21, 2025, and widest on Thursday, April 10, 2025.

• Despite the U.S. Fed funds rate declining -75 bp over the past 12 months, 10-year UST rates have fallen only 10 bp YoY, while 5-year UST rates are down 41 bp YoY. This muted decline in longer-duration UST rates has driven overall credit spreads wider in 2025.

Bloomberg 10Y credit spreads are derived by taking the Moody's index yield and subtracting the UST 10Y YTM.

US fund flows for the week ended Dec. 3, compared to a week earlier, according to LSEG Lipper.

Short and intermediate investment-grade bonds: $1.64b inflow vs. $926.3m outflow

High-yield notes: $1.18b inflow vs. $702.9m inflow

Treasuries: $3.06b outflow vs. $5.83b inflow

US leveraged loans: $182.1m outflow vs. $60.1m outflow

Mortgage-related: $86.2m outflow vs. $364.5m outflow

• Dedicated Investment Grade corporate bond ETFs had net inflows of +$509 million (vs +$621 million last week).

• Dedicated High Yield corporate ETFs had net outflows of –$284.74 million (vs inflows of +$1.14 billion last week).

Five additional November 2025 new G-255 issues, plus one from September, have hit their model-defined avoid levels. Across all G-255 new issues, 87% of indicators have delivered an average return of just under –8 bp over a 33-day holding period. In 2025, 936 of 1,082 bonds issued ($1.122 trillion notional) have triggered avoid signals.

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G-255 Credit and Equity Market Indicators December 5

• Attractive Long Credit Indicators: 65, (-8 from Thursday and -40% below the 200-day moving average of all long indicators).

• Attractive Long Credit Market Cap accounts for: 39% of all undervalued Systematic Credit capital.

• Attractive Short Credit Indicators 868, (+49 from Thursday and +70% above the 200-day moving average of all model short trade indicators).

• Attractive Short Credit Market Cap accounts for: 59% of all overvalued Systematic Credit capital.

G-255 Equity Trade Indicators and US Equity Correlation to Overall US Credit Spreads

US equities and credit markets moved in identical directions Thursday while equities as US credit is now tighter over the past 2 weeks. The two markets have directionally correlated in 11 of the past 15 trading days.

• US equities are unchanged over the past month; US credit spreads are now slightly wider MoM.

• 2025 is on track for the second-weakest year in 32 for USD credit-equity correlated movement—historic 80% vs. ~74% this year.

Systematic Equity Trading Indicators December 5

• Attractive Long G-255 Equity Trade Indicators: 59 (includes both undervalued and equities priced at

extreme discount (-4 from Thursday and -3% the 200-day moving average of all long trade indicators).

• Attractive Short Equity Trade Indicators 7, (-1 from Thursday) and -16% to the 200-day moving

average of all model short trade indicators).

• Why are G-255 equity issues outperforming the S&P and Dow? A: Over 30% of the 242 publicly traded G -255 equities have already reached their 2025 low price and 40% of the G-255 issuers are non – US corporates.

• G-255 issuers are returning more capital to shareholders (via dividend growth and share repurchase) than S&P issuers as a whole.

• Highest ranked equity long indicators on Thursday:

Meta Platforms Inc (META) Comcast Corp (CMCSA) Walt Disney Co/The (DIS)

Oracle Corp (ORCL) T-Mobile US Inc (TMUS) Home Depot (HD)

Carnival Cruise (CCL) Royal Caribbean (RCL) American Tower (AMT)

Altria (MO)

• Equities leaving highest ranked long indicators on Thursday:

ATT (T)

G -255 Issuer News on Thursday

Warner Bros. Discovery Inc. (WBD Ba3/BB attractive long credit/equity) has entered exclusive negotiations to sell its film and TV studios and HBO Max streaming service to Netflix Inc.

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G-255 Specific Credit Sector Indicators December 5

Long Opportunities:

Focus on de-leveraging issuers, including Single A and BBB-rated TMT, UK Banks, US Regional Banks, Canadian Banks and Floating Rate Notes.

• Valuation Insight: The stochastic credit trading model identifies 194 undervalued bonds ($234 billion market

value), with 67 long trade indicators across the 6,000-bond USD universe.

• At present only Single A rated TMT, and BB rated TMT have 10+ long individual bond trade indicators.

Short Opportunities

• 1,520 bonds ($2.605 trillion) are overvalued per the stochastic credit trading model, with 867 short trade indicators.

• U.S. Big 6 Banks (all ratings): No longer a short indicator as of 10/22. +6 to +14 bp 9/22 – 10/22

• Single A and BB Energy: No longer a short indicator as of 10/27. Bonds +6 to +14 bp 9/27 -10/27

• Single A Healthcare: No longer a short indicator as of 10/22. Bonds +5.5 to +13 bp 9/22 – 10/22

• Single A Industrials: No longer a short indicator as of 10/22. Bonds +6.5 to +15 bp 9/22 -10/22

• Autos: 156 bonds ($166.78 billion) are overvalued, with 119 short trade indicators

Systematic Portfolio Daily Trading Model Indicators

• Long Indicators: Target deleveraging new issues with attractive valuations, focusing on 5-year maturities.

• Short Indicators: Target releveraging issuers trading at the deepest discount from their model avoid point, avoiding 7-year maturities due to low attractiveness.

• Replace Longs: Swap long positions that have reached their avoid trading level.

• Portfolio Trading Hurdle: Maintain a 1:1 long-to-short ratio once the 67.5% long position threshold is reached.

• Current Status: Add new supply trades where the issuer is deleveraging; add new issue bonds where spreads widened by +2 basis points.

• Current Status of Trading Indicators: Last week, one short trade and two long trades reached their avoid trading level. The trading model added three long indicators.

Monitor Trade Position Composition:

• Track the percentage of long positions relative to the total portfolio.

• If replacing long positions that have reached their avoid trading level pushes the portfolio above the 65% long hurdle, initiate short positions in releveraging issuers (avoiding 7-year maturities) at a 1:1 ratio for additional long positions.

• Review: Reassess portfolio balance after today's fund flow data to ensure alignment with the systematic strategy.

• Look for individual bond indicators to change overnight: Historic trading levels are leading to overnight adjustments to long, short and avoid indicator levels.

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G-255 Specific Bond Trading Indicators December 5

• Closed Positions: The Cigna (Baa1/A-) CI 2.4 03/15/30 (short) and Amazon (A1/AA) AMZN 4.35 03/20/33 (long) both reached their avoid trading levels Wednesday November 19. The Truist Bank (Bank Sub A3/A-) TFC 2 ¼ 3/11/30 short trade indicator reached its avoid trading level on Monday November 21. The General Motors (Baa2/BBB) GM 3.6 06/21/30 short trade indicator reached its avoid trading level on Monday 11/24.

• Enter New Longs: The trading model added Meta (AA3/ AA-) META 4 7/8 11/15/35 and META 5 1/2 11/15/45 new supply long trade indicators on 11/7. The new Amazon (A1/AA) AMZN 4.35 03/20/33 was added to the Model Trade on Monday 11/17. On Tuesday December 2, the Florida Power & Light (Aa2/A+) NEE 5.6 02/15/66 and on Wednesday December 3, Celanese (Ba2/BB+) CE 7 02/15/31 were added as new issue long indicators.

• Enter New Short Trades: The trading model added General Motors (Baa2/BBB) GM 3.6 06/21/30 as a short trade on Monday 11/17. The trading model added BP (A2/A) BPLN 4.893 09/11/33 as a short trade on Thursday 11/20, the Toyota (A2/A) TOYOTA 4.8 01/05/34 Monday 11/21 and the CVS (Baa3/BBB) CVS 1 3/4 08/21/30 on Monday 11/24

Current Sample Systematic Basket bond trades based on trading strategy December 3

Systematic Trading Indicators Thursday: None
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G-255 Credit Basket Trade Statistics

Tuesday's Basket Trade Long/Short Ratio: 72%

Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – December 4, 2025)

Performance Summary: Total Trades: 191 (1% of total trade indicators).

• Long Indicators: 126/147 reached avoid-trading levels, tightening by -9.2 bp.

• Short Indicators: 36/44 reached avoid-trading levels, widening by +5.85 bp.

• Remaining Longs: 21 tightened by -1.59 bp.

• Remaining Shorts: 8 tightened by -17.06 bp.

• Average Spread Movement: ± 6.63 bp in the indicated direction.

• Success Rate: 86% of indicators reached avoid-trading levels, which is slightly below normal.

• Average trade holding period: 23.1 days (above average)

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.