Systematic Credit and Equity G-250 Trading Indicators for May 23, 2025
Thursday marked another day of below-average credit trading across all metrics. End-of-day equity volatility, driven by Futures/ETF-dominated trading, has become standard in U.S. risk markets.
With the long weekend ahead, I'm dedicating one page to address the most frequently asked question about our trading model and its origins.
The Curve Asset Management (CAM) trading model originated from my 1981 undergraduate honors thesis at Lawrence University, titled "Entry Barriers in Professional Baseball." This work, the first computer-based statistical abstract for the sport, was once published by my alma mater, though its current print status is unclear.
The credit trading model is built on five core data hierarchies, using only publicly available financial and trading data. It applies finite mathematics stochastically and incorporates a modified version of the Modigliani-Miller theorem. A key feature eliminates the need for forecasting: by analyzing the entire sample set with finite math and stochastic methods, the model achieves a 98.7% accuracy rate in its indicators. Why? Bonds have finite returns, and among the world's top 250 corporate debt issuers (those with at least $15 billion in market capital), the default rate is under 0.02% when they are actively reducing debt.
Since Ibbotson began publishing corporate bond returns in 1977, there have been 22 major bankruptcies, but only two—Lehman Brothers and Washington Mutual—occurred while the issuers were materially reducing debt. Post-Lehman and WaMu, the model was updated to treat significant equity price volatility (a 10% price drop in under 30 days) as a safeguard against indicating long positions. The model's foundation traces back to the 1970 Penn Central bankruptcy, which triggered over 100 rail bankruptcies and the only double-dip U.S. recession in modern history.
I developed and refined the model while serving as Director of Investment Operations at Fidelity Management and Research Company and Fidelity International from 1988 to 1993. It was later used to manage large capital allocations as CIO of Curve Asset Management.
The model is fully systematic, relying on issuer-reported and market-trading parameters without human input. Initially designed to manage $450 billion across the world's top 300 issuers (including SSAs) with over $30 trillion in market debt, it is highly scalable, replicable, and auditable. It targets ±5 basis points of credit spread movement in minimal trading days, balancing return maximization with volatility risk.
The model focuses on the G-250 trading universe, which accounts for 72% of global corporate debt and 65-85% of daily USD TRACE trades. It can be executed entirely on electronic platforms.
Why publish instead of trade? At 66, I find greater fulfillment in sharing the model's insights than trading it. As the only credit professional to have led research at the world's largest fund manager and successfully managed multi-billion-dollar portfolios, I enjoy answering questions about systematic credit trading and providing model outputs to those interested.
The second most common question I receive concerns my writing style. Yes, it carries a certain confidence—some might call it arrogance. But it's easy to be confident when the outcome is nearly certain. Credit trading relies on finite mathematics, yet much of the market overcomplicates this simplicity. A bond has a 99.8% chance of maturing at par. Our model employs stochastic algorithms to capture volatility, driven by balance sheet dynamics, historical trading levels, equity prices, liquidity, and the issuer's yield curve. I find this process immensely satisfying.
At 66, I often encounter claims that defy logic and evidence. Our model is grounded in economics, fund flows, market trading data, and company disclosures. Most importantly, it buys market volatility rather than selling it, leading to more stable returns for mandates that include long/short trade positioning.
Inflation Readings, Economic Data and Interest Rate Calls
Thursday's U.S. Purchasing Managers' Index (PMI) data showed elevated prices paid and received, with new orders improving, employment declining, and composite readings slightly up month-over-month.
However, markets remain skeptical of inflation narratives until survey data translates into government-reported inflation figures. As noted previously, inflation expectations have consistently led to higher reported inflation within 3–9 months.
U.S. jobless claims rose 11,000 year-over-year for the week ending May 16, while continuing claims for the week ending May 9 reached 1.903 million, the second-highest since November 2021.
Earnings Season Insights
BT (BT/A) reported weak topline results, continuing the trend of underwhelming corporate performance, but announced a share repurchase program funded by its balance sheet. Toronto Dominion (TD) and Santander UK (SANUK) reported lower year-over-year interim earnings, with credit charge-offs up over 30% year-over-year.
Dividend and Share Repurchase Trends
Among the 163 largest non-financial corporate debt issuers, dividends and share repurchases grew 12% year-over-year, fully funded by corporate bond market access, while revenues rose 3.87% on average.
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Toronto Dominion (TD), the first Canadian bank to report, highlights trends among the world's largest corporate debt issuers, particularly Yankee banks. Non-U.S. banks account for 45% of global top issuers' debt and 65% of global liquidity. The 40 largest non-U.S. banks hold nearly as much cash as debt. Leverage is growing primarily among the U.S. Big 6 banks and U.S. non-financial issuers.
Thursday's US IG Credit Trading:
USD trading volumes were 7% above average on Thursday but 10% below the prior week. G-250 issuer bonds comprised 46 of the top 50 corporate issuers traded, accounting for 72% of Wednesday's TRACE volume. Dealers sold $1.5 billion in investment-grade (IG) credit, consistent with daily norms. Financials made up 31% of traded bonds, while TMT was the only sector net sold.
Market Movement
The U.S. CDX index tightened by 0.5 basis points to 58. U.S. IG cash spreads tightened by 1–4 basis points. Industrials and Utilities outperformed, while Financials closed slightly wider.
Attractive Trading Sectors
Long Opportunities: Selected new issues.
Short Opportunities: US Big 6 Banks, all ratings ($583.5 billion in overvalued market capital, 211 bonds, 28 short indicators).
Single A and BBB TMT ($251.1 billion in overvalued market capital, 146 bonds, 27 short indicators).
Single A and BBB Healthcare ($149 billion in overvalued market capital, 109 bonds, 25 short indicators).
Issuer News Thursday
UniCredit SpA (UCGIM) plans to file a claim with Italy's administrative court to assess the conditions imposed by the government on its bid for Banco BPM SpA
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. 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 25 basis points wider year-over-year).
New Supply / Bond Maturities / Credit Fund outflows for May
No new G-250 U.S. supply was issued on Thursday as we approach the long weekend.
In May, new 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.
The average offering size of $882 million and 455 transactions mark the lowest figures since 2020, despite no COVID, financial crisis, or other disruptions. The slowdown in new supply and U.S. trading volumes reflects capital shifting to non-USD markets and declining U.S. credit fund flows.
Fund inflows were modestly improved last week:
According to Lipper fund flows for the week ended May 21:
Short and intermediate investment-grade bonds: $1.53b inflow vs. $1.85b inflow
High-yield notes: $1.16b inflow vs. $2.6b inflow
Treasuries: $2.34b inflow vs. $467.4m outflow
US leveraged loans: $254.8m inflow vs. $1.22b inflow
Mortgage-related: $529.2m inflow vs. $1.43b inflow
Systematic Trading Model Indicators and Trading Strategy - Thursday
The most significant long trading opportunities are now getting attractively priced new issues. Secondary long opportunities require wider spreads, and attractive short opportunities need tighter trading levels to be actionable.
Friday's 204 attractive short trading indicators are 53% below their 2 year average while US credit has recovered (-27bp) of spread, after widening by (+72bp) from November 12, 2024.
Systematic Trading Strategy for Friday May 23
The model advises selling long positions when they reach the "avoid trading" level and delaying larger short positions until the number of attractive short indicators reaches 400.
Long Positions
Focus on attractive bonds (or new supply) from issuers that have already reported earnings. For fixed-coupon bonds, prioritize issues with a size exceeding $1 billion.
Short Positions
Target issuer bonds trading within 20% of their 52-week tight spread, where the underlying company is releveraging its balance sheet.
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 Indicators
No new trading opportunities going into the long holiday weekend.
Thursday Sample Trading Indicators and Credit Spread Movement
Since January 4 of this year we have published 106 trading opportunities 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 (+3.52bp) on average.
• The remaining 3 short indicators credit spreads have tightened by (-1bp) on average.
• Across all 106 opportunities, credit spread movement has been +/- 5.75 bp in the direction of the indicators.
Earnings reports from Yesterday
Toronto Dominion (TD, A2/A- Sr. Unsec)
• Toronto Dominion (TD): Reported Q2 results, including a $12.5 billion gain from selling its 10% stake in Schwab (SCHW). Excluding the asset sale, TD reported 9.5% YoY revenue growth and a 5% YoY earnings decline. Loan charge-offs rose 30% YoY, with a shrinking loan book and a 28% YoY increase in non-performing assets. Deposits are declining, but the company is retaining capital, and trading income is improving significantly. TD also announced restructuring initiatives in the U.S.
• Financial Position: TD holds more cash than debt with a 14% CET1 ratio, ensuring its balance sheet can withstand significant credit challenges.
• Model Trading Indicators: Of TD's 45 liquid USD secondary trading bonds, only 4 are undervalued at current levels. The TD 5.141 09/13/28 is the most undervalued according to our trading model. The model does not view TD equity as attractive at last night's closing price.
Santander UK (SANUK, Baa1/BBB SNP)
• Santander UK (SANUK): Reported Q1 net interest income down 6% YoY, with after-tax profit falling 2.5% YoY. Credit impairment charges surged 250% YoY, and credit quality is deteriorating. Customer deposits remained flat YoY, and CET1 was stable at 14.8% QoQ.
• Financial Position: SANUK does not release detailed balance sheet data as of March 31 or September 30, but available data indicates re-leveraging as of 3/31/25. Management noted a need to refinance approximately £7.5 billion in short-term financing.
• Model Trading Indicators: Of SANUK's 14 USD secondary bonds, 5 are overvalued, with 2 identified as attractive short trading opportunities. The SANUK 5.694 04/15/31 is the most attractive short indicators. As Santander UK is owned by Santander (SANTAN) Spain, there is no publicly traded SANUK equity.
BT (British Telecom (BT/A Baa2/BBB)
• BT (BT/A): Reported 2H declines in most metrics except adjusted profit. Revenue has not grown since COVID, and the company is losing subscribers. BT announced a share repurchase program for the upcoming fiscal year.
• Financial Position: Net debt increased slightly YoY to £15.915 billion. BT has no plans to deleverage its balance sheet as the company contracts.
• Model Trading Indicators: Of the 5 remaining USD-denominated secondary bonds, the BRITEL 3 1/4 11/08/29 and BRITEL 8 5/8 12/15/30 are overvalued. The model also views BT/A equity as an attractive short trading opportunity at last night's closing levels.
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.