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Fri, May 30, 2025

Systematic Credit and Equity G-250 Trade Indicators for May 30, 2025

Trading Curves and Model Indicators

We received inquiries regarding trading curves and model Indicators for HSBC, BPCEGRP, ARAMCO, BAC, JPM, and GS. All are part of the G-250, allowing us to provide comprehensive credit curves and model indicators for each. Additionally, questions were raised about the NFE capital structure, long/short trades, and high-yield (HY) markets.

  • Systematic HY Trading Model: Yes, we have a systematic HY trading model with distinct criteria for trading capital compared to the investment-grade (IG) model.

  • Model for Perpetual Bonds (Perps): Yes, a dedicated model exists for Perps.

For further details or model outputs, please reach out. Note: I'll be at the HardRock Hotel and Casino in Tampa this afternoon, observing poker players to study probability and betting techniques. While I enjoy publishing, I do take time off, especially post-earnings season.

Market Trends

This week, a holiday-shortened period, saw credit spreads tighten by -1 to -3 basis points (bp) daily and -10 to -20 bp monthly, depending on the sector. However, trading volumes remain subdued, averaging -10% below normal. Over the past month, volumes exceeded +10% above average only twice but fell below -10% six times.

With earnings season concluded, the G-250 (soon to expand to G-254 as of August 15, 2025) continues its 18-month trend of balance sheet expansion. Corporate debt among the top 250 issuers grew by over $1 trillion (+21%) in the past 12 months, driven by debt issuance for "general corporate purposes" to enhance shareholder value.

HSBC Trade Analysis

HSBC was the only G-250 issuer in the US or Europe today, as Europe observed Ascension Day, halting new supply. The HSBC Perpetual bond, with a 5-year call and Baa3/BBB rating, saw initial pricing guidance increase to 7 5/8% (US IPT: 7.5%). This marks HSBC's 11th offering this month, potentially a record. Our model views UK banks as an attractive long sector within the G-250, but the Perp would need a yield of 7.25% or higher to be compelling.

The deal priced at 7.05%. Our model's 7.25% target reflects credit rating and margin requirements:

  • The HSBC 5.79 05/13/36 trades at +128/10Y with a ~10% margin requirement (SEC Rule 15c3-1), yielding a 57% annual return.

  • The Perp, with a 7% return and 15% margin requirement due to its lower BBB rating, yields a 46% annual return.

  • The 10-year bond benefits from spread tightening as it rolls down the maturity curve, unlike the Perp.

Our trading model evaluates volatility, liquidity, and margin risk for all 6,200 securities in our universe.

Published Model Indicators

Of the 110 daily model Indicators (1% of total recs), 78% reached their "avoid" threshold (no longer attractive for long or short) within 60 days, 15% below average. For these Indicators (7-year duration), the average spread movement was 6.48 bp. With a 12.5% margin requirement, how high are annual returns? Very high. But more importantly, the level of volatility in the results are materially lower than market volatility.

The model's accuracy is approximately 95%.

Inflation, Economic Data, and Interest Rate Outlook

  • Initial Jobless Claims (Week Ended May 23, 2025): 240k, up 19k year-over-year.

  • Continuing Claims (Week Ended May 16): 1.919 million, up 121k.

  • Unemployment Rate: Analysts' 4.2% forecast for May (reported next Friday) appears optimistic; 4.3% or 4.4% is more likely.

  • Rail Traffic and Economic Indicators

The Association of American Railroads (AAR) reported U.S. rail traffic for the week ending May 24, 2025:

  • Total: 488,709 carloads and intermodal units, +0.7% year-over-year.

  • Carloads: 226,091, +3.8% year-over-year.

  • Intermodal: 262,618 containers/trailers, -1.8% year-over-year.

  • Year-to-Date (First 21 Weeks of 2025):

    • Carloads: 4,580,934 (+2.3%).

    • Intermodal: 5,699,709 (+7%).

    • Total: 10,280,643 (+4.9%).

Rail carloadings correlate to GDP growth. Rail carloadings indicate the US economy is weakening.

Earnings Season Insights

Earnings reports were released today from Royal Bank of Canada, Canadian Imperial Bank of Commerce, Nationwide UK, Dell Technologies (DELL), AutoZone (AZO), Best Buy (BBY), Costco (COST), and Gap (GPS). Retail trends show divergence: same-store sales for used cars and lower-priced food/household products rose 5% year-over-year (YoY) in the latest quarter, while other retail sectors (e.g., Walmart, Home Depot, Lowe's) reported flat YoY comparable store sales.

Why are comparable store sales significant? Non-financial borrower revenue growth is decelerating. Financial sector revenue growth is flat quarter-over-quarter (QoQ) but up 7% YoY. Meanwhile, 55% of the G-250 largest corporate issuers have increased net borrowing by $1 trillion (+20%) over the past year to support balance sheet expansion.

While we don't forecast, 1Q 2025 data suggests that if issuers aim to sustain shareholder payouts, corporate bond issuance and on-balance-sheet debt must grow further if revenue growth remains at 5%.

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

Dealers purchased $2.5 billion in IG paper on Thursday, with trading volume 9% above average. However, if Thursday marked the end-of-month (EOM) trading, EOM volume was 14% below average. The CDX IG index closed unchanged at 56 basis points (bp).

Market Movement

  • U.S. CDX Index: Unchanged at 56 bp.

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

  • Sector Performance: Industrials and Energy outperformed; Financials and Consumer Discretionary underperformed.

  • G-250 Bonds: Accounted for 72% of Thursday's trading volume.

Attractive Trading Sectors

Long Opportunities

  • Yankee/Euro Banks/Canadian Banks: $98.1 billion in undervalued secondary capital across 75 bonds.

Short Opportunities

  • U.S. Big 6 Banks (All Ratings): $601.9 billion in overvalued market capital across 229 bonds, with 37 short indicators.

  • Australian Banks: $66.6 billion in overvalued market capital across 58 bonds, with 16 short indicators.

  • Single-A Healthcare: $104.4 billion in overvalued market capital across 73 bonds, with 21 short indicators.

Issuer News Thursday

  • BP Plc appointed oil industry veteran Dave Hager to the board, bolstering its efforts to refocus on fossil fuels and keep investors on side.

  • United Airlines' (UAL) second-quarter profit will fall below its original outlook due to flight disruptions and air traffic control outages at its Newark hub. The disruptions have driven away passengers, forcing the carrier to cut ticket prices for the summer, with leisure travel demand dropping 15% year over year.

U.S. IG Credit Valuation and Spreads

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

Global Equity Correlation to IG Credit Spreads

US equity markets were close to unchanged on Thursday. As were US credit markets. US credit spreads have correlated with with US equity index movement in 17 of 19 trading days in May.

New Supply / Bond Maturities / Credit Fund Outflows for May

USD G-250 Supply: On Thursday, HSBC issued the only G-250 deal, a $2 billion 5nc Perpetual bond at 7.05% (covered earlier).

U.S. Fund Flows (Week Ended May 28, 2025, per LSEG Lipper):

  • Short/intermediate IG bonds: $1.73b inflow (vs. $1.53b prior week).

  • High-yield notes: $242.3m inflow (vs. $1.16b).

  • Treasuries: $1.85b inflow (vs. $2.34b).

  • U.S. leveraged loans: $295.6m inflow (vs. $254.8m).

  • Mortgage-related: $38.4m inflow (vs. $529.2m).

Corporate Bond Sales: May 2025 saw over $150 billion in corporate bond sales, the busiest May since 2020. However, 7 of 19 trading days had below-average volume, with total volume at $1.135 trillion (-10% below average).

Systematic Trading Model Indicators and Trading Strategy - Friday

This morning's model generated:

  • 267 attractive short indicators, 57 fewer than Thursday AM particular widening in Big 6 financials.

  • 77 attractive long indicators, 8 higher than Thursday but 38% below the 2 year average.

  • Of over 6,000 bonds in our research universe, 344 are trading near their 52-week tight or wide spread levels, 38% below normal and 39% below the threshold for adding short positions.

Systematic Trading Strategy for Friday May 30

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. New supply is unlikely on Friday.

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 +2.55 bp.

  • 3 remaining shorts tightened by -3 bp.

  • Average spread movement: ±6.48 bp in the Indicated direction.

  • 78% of these Indicators reached avoid-trading levels (12% below normal).

Corporate Updates

Canadian Imperial Bank (CM A2/A- Holdco)

  • Q2 Results: 14% revenue and 15% YoY earnings growth, driven by Canadian Commercial Banking (+13% op income), Capital Markets (+20% YoY), and U.S. Commercial Banking/Wealth Management (doubled net income YoY due to higher AUM and lower charge-offs). Net interest margin (NIM) outperformed peers, despite 20% charge-off increase ($605m vs. 34% for other Canadian banks).

  • Financial Position: CET1 ratio at 13.4%. Deposits grew QoQ but declined YoY due to falling Canadian rates. Loan book growth is flat, with credit quality at a 10-year low. CIBC continues dividend growth, share repurchasing, and net debt increases to return capital to shareholders. Despite negative operating metrics, the 13.4% CET1 and 0.88% NPL ratio indicate stability.

  • Model Trading Indicators: CIBC issues limited USD debt beyond 5 years, benefiting from lower funding costs in Canada and Europe. Of 29 liquid USD secondary bonds, less than half are overvalued. Attractive shorts: CM 4.857 03/30/29 and CM 3.6 04/07/32 SR Holdco bonds. 31% chance of USD bond issuance in the next 2 weeks. CIBC equity is an attractive short above C$95.00.

Royal Bank of Canada (RBC, A1/A Holdco)

  • Q2 Results: 10% revenue and earnings growth, with a 50% increase in charge-offs ($1.4b) and 13% growth in asset management/mutual fund fees. Deposits grew, but credit quality hit a multi-year low (still better than most banks). Loan book growth was <1%.

  • Financial Position: CET1 ratio at 13.2% with net cash. RBC spent $8b on shareholder returns in H1 2025 (dividends and buybacks) without losing capital. The model avoids critiquing management but notes that current buyback levels are questionable.

  • Model Trading Indicators: Over 100 attractive long indicators in RBC's USD secondary curve in the past 3.5 years. 53% chance of new bond issuance in the next 10 trading days. Attractive longs: RY Float 01/24/29 and RY 5 02/01/33. RBC equity is attractive at current levels.

Nationwide UK (NWIDE, A1/A+ Holdco)

  • H2 Results: 37% YoY revenue and 25% organic earnings growth post-Virgin Money acquisition. Net mortgage lending reached £15.9b (Nationwide subgroup: £15.5b), with market share rising to 16.2% (2024: 12.3%). Retail deposit balances grew by £67.3b to £260.7b, with deposit market share at 12.2% (2024: 9.5%). Loan book grew 33%, with improved credit quality.

  • Financial Position: CET1 ratio fell to 19.1% after £1b in stakeholder payouts (up from £344m). Shareholder equity grew 16% to £20b. Net debt increased due to the Virgin Money acquisition, but disciplined capital management supports the A1/A+ rating.

  • Model Trading Indicators: NWIDE has 11 USD secondary bonds, typically issuing USD debt in July–September. Six are overvalued, but none are attractive shorts. No public equity.

Dell Technologies (DELL, Baa2/BBB)

  • Q1 Results: Revenue of $23.4b (+5% YoY), operating income of $1.2b (+21% YoY). Record Q1 cash flow from operations: $2.8b. Returned $2.4b to shareholders, doubling the quarterly average since FY23. FY26 revenue outlook: $101.0b–$105.0b (+8%).

  • Financial Position: Net debt continues to rise. Dell plans to use its balance sheet for further equity repurchasing.

  • Model Trading Indicators: Of 19 liquid USD secondary bonds, 9 are overvalued, with 4 attractive shorts. DELL 5 3/4 02/01/33 is the most attractive short. DELL equity is an attractive long below $110.13.

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.