Systematic credit trading overview and model indicators
22 July 2025 - Not recommendations
Good morning, today 6 new G-255 deals to watch and 11 G-255 issuers (all US-based) reporting earnings. Headlines focus on potential trades to hedge the possible replacement of Federal Reserve Chairman Jerome Powell, which seemed to suppress trading activity across all markets on Monday.
Earnings Summary for the Week of July 24
Following Verizon (VZ Baa1/BBB+, rated attractive long) earnings, our trading model indicates 12 issuers as attractive longs and 20 issuers as attractive shorts. On Monday, we will release the initial 2Q model layout, detailing bond dispersion for Single A, BBB, and High Yield (HY) categories by model indicator. Preliminary insights suggest an increase in bonds available for shorting and a reduction in bonds available for purchase since the start of the earnings season.
Fed discussions … Again?
Our product is entirely systematic, relying on five data hierarchies that analyze all 6,000 bonds without human intervention. The output generates risk modules and trade indicators as market dynamics shift. When political factors, such as Presidential politics or speculation about the Federal Reserve Chair, influence trading, our model does not “adapt.” Instead it “reacts” and creates systematic credit trading indicators based on market change..
With 44 years of experience, I’ve been asked to share my perspective on trading strategies in light of a potential ouster of Chairman Powell. My opinion is grounded in historical context.
Over the past 35 years, the US has experienced only three years of negative real GDP growth. During the same period, the S&P 500 recorded nine years of negative returns. Notably, only one Federal Reserve Chair in modern times, Janet Yellen, avoided presiding over either negative real GDP growth or an annual equity market decline exceeding -5%.
The probability of a (-5%) or more stock market decline or negative real economic growth within 3 years of the Fed Chair change whenever it happens are 100%. Its not a matter of “if” it’s a matter of “when.” “I could explain it better. But I would need some charts and easels…” The American President 1992.
AI, Fed Chair Changes and Market Valuation
Yes equities are “overvalued” but equity valuation has never been strongly correlated with equity market price movements. Let me emphasize: equity market valuation does not reliably predict equity market performance. This is a fact, not speculation.
The most significant factor influencing equity price movements is the combined total of money market fund balances and cash held at banks, currently near a record high of over $9.7 trillion which we write about often.
U.S. credit markets are not loosely tied to U.S. equity prices—they are directly correlated, with one often leading the other. However, the magnitude of credit valuation changes does not directly correlate with equity price movements.
Why? Bond mathematics is binary, with finite returns, while equity mathematics is exponential due to the potential for "unlimited returns." The only consistent correlating factor between these markets is cash returns to shareholders. I got it from the same place Warren Buffet got it. Graham and Dodd “Securities Analysis” which was published in 1934.
Over the past 15 months, a notable shift has occurred: many of the world's largest corporations are tapping the corporate bond market to fund dividend payments and repurchase equities at record-high valuations. This challenges the narrative of "overvalued" equity markets. The boards of the 255 largest corporations are collectively spending over $2 trillion annually, borrowing more than $1 trillion to repurchase stock at these highs. If equities are overvalued, then one would think that the corporate board Directors could find better uses of their cash and borrowing capacity.
G – 255 Issuers reporting results Tuesday
General Motors GM, Baa2/BBB attractive short) Bef-Mkt
KeyCorp (KEY, Baa2/BBB attractive long) Bef-Mkt
Coca Cola (KO A1/A+ attractive short) Bef-Mkt
Philip Morris (PM A2/A- attractive short) Bef-Mkt
Danaher Corp (DHR A3/A- attractive short) Bef-Mkt
Lockheed Martin (LMT A2/A- attractive short) Bef-Mkt
Raytheon (RTX Baa1/BBB+ attractive short) Bef-Mkt
Northrop Grumman (NOC Baa1/BBB+ attractive short) Bef-Mkt
Tenet Healthcare (Ba3/BB attractive long) Bef-Mkt
Capital One Financial (COF Baa1/BBB+ attractive long) 4:05pm
Texas Instruments (TXN Aa3/A+ attractive short) Aft-Mkt
Systematic Trading Model Insights and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 808 bonds are within 20% of their 52-week tight or wide - spread levels, 54% above historical averages. Yesterday’s trading saw Single A rated credit spreads move wider from 52 week tight spreads. Last week’s fund flow data leaves current trading allocation unchanged since July 10.
Current Trading Allocation Strategy
57% Long: Focus on undervalued, deleveraging bonds.
23% Short: Target overvalued bonds in re-levering sectors.
20% Front-End Allocation: 75% in floating-rate notes maturing within 3 years.
Performance: Of 134 long/short trades in 2025 (marked to market via TRACE), 90% achieved ±5 bp targets, averaging ±7.65 bp per trade.
Recent Activity: Short position additions paused on July 2, 2025, due to non-replaced long positions from late June to early July. Between June 30 and July 16, 2025, 13 long trade indicators reached “avoid” levels, shifting the long/short basket to a “more short” stance. 3 new attractive long new-issue recommendations were published last week.
Sector Trading Recommendations
Long Opportunities:
Yankee Banks (especially floating-rate notes).
Single A TMT
Short Opportunities:
U.S. Big 6 Money Center Banks.
Single A and BBB Energy issuers re-levering
Single A and BBB Industrials (re-levering, tight spreads).
BBB TMT (larger tech issuers re-levering).
Risk Management
The model avoids adding risk to G-255 issuers scheduled to report results within 30 days, complying with global regulatory requirements for reporting material events.
Inflation, Economic Data, and Interest Rates
Conference Board leading economic index fell 0.3% in June. This compares to 0.0 reading in May
Monday’s U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: -17% below average
-G-255 Issuers: 94 of the top 100 traded issuer bonds accounted for 94% of top 100 issuer volume and 73% of total TRACE volume.
High-Yield (HY) Trading
-Volume: -15% below average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 61% of top 25 issuer volume and 59% of total TRACE volume.
Market Movement
U.S. CDX Index: tightened by (-1.1bp) @ 50.9 bp
U.S. IG Cash Spreads: Ranged from (+1bp) wider to -2bp tighter; US financials outperformed while Utilities were slightly wider.
CDX HY Index: Unchanged @ 107.5 (per Bloomberg)
HY Cash Bonds: HY autos outperformed. BB Fins were slightly lower.
High-Yield Activity
- US Dealers bought $ 300 million of HY bonds Monday.
Most Bought HY Bonds
- Ford Motor Credit (F Ba1/BBB- attractive attractive short)
Most Sold HY Bonds
- Warner Media Holdings exchange bonds (WBD Ba21/BB attractive long)
Investment-Grade Activity
- US dealers bought $1.2 billion of IG bonds Monday.
Most Sold Sector away from New Issues: Yankee Banks
- UBS (UBS, A2/A- attractive long)
- Barclays (BACR, Baa1/BBB+ attractive long)
Most Bought Sector: Yankee Auto Finance
- Stellantis Auto Fin (STLA Baa2/BBB attractive long)
- Hyundai Capital (HYNMTR A3A- attractive long)
Attractive Trading Sectors
Long Opportunities
Floating Rate Notes of de-levering issuers Overall model indicators 182 bonds ($271.6 billion) are considered undervalued by the stochastic credit trading model with 59 attractive long trade indicators for the entire 6,000 bond universe.
Short Opportunities
1433 bonds ($1.41 trillion) are considered overvalued by the stochastic credit trading model with 743 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $727 billion in overvalued market capital across 289 bonds, with 154 short recommendations.
BBB TMT $209.2 billion in overvalued market capital across 124 bonds, with 49 short recommendations.
Single A and BBB industrials $152.6 billion in overvalued market capital across 124 bonds, with 54 short recommendations.
Single A, BBB and BB energy $225.7. billion in overvalued market capital across 153 bonds, with 91 short recommendations.
Issuer News
None – over and above the 40 G – 255 issuers reporting earnings this week.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 48% of the widening observed from November 12, 2024, to April 10, 2025.
Credit Trading Model Valuation: U.S. credit remains overvalued based on output from our credit trading model.
2025 credit spreads: Are wider YTD and YoY
UST 10Y rates are +13 bp higher YoY and -18bp lower YTD
Bloomberg credit spread data: Our trading model IP relies exclusively on individual bond and issuer credit inputs. None of the valuations or indicators generated by our model incorporate index inputs or outputs. We publish Bloomberg index data solely to illustrate the directional movement of the credit markets. We acknowledge that Bloomberg credit spread data may not align perfectly with other investment bond indices and is generally "wider." However, Bloomberg index data is more inclusive and requires significantly less end-of-month calibration and rebalancing compared to other indices.
Global Equity Correlation to IG Credit Spreads
We are told that US credit spreads U.S. IG credit spreads were tighter. U.S. equity prices correlated directionally for 58th trading day in 66. While credit spread movement has an 80% correlation to the equity price movement, the magnitude of these moves has changes markedly over the past 2 years. This owes to the world’s largest corporates using balance sheet to fund equity share repurchase and dividend payout
New Supply, Bond Maturities, and Credit Fund Inflows for July
Monday saw 6 G-255 issuers sell 12 USD deals totaling $13.6 billion. All 6 Bank of America (BAC Baa2/BBB-), John Deere Capital (DE , A1/A), Bank of Montreal (BMO Baa3/BBB-), Pepsico (PEP, A1/ A+) and Truist Bank (TFC A3/A-) are re-levering their balance sheets and come to market on average more than 3 times per year.
Our systematic credit trading model saw 8 of the new issues attractive at new issue pricing and those deals all traded at new issue spread or tighter in the grey markets.
Pepsico also sold €1 billion of new supply in Europe (12Y and 20Y) which comes as a mild surprise given their European Frito Lay public relations issues which started 2 years ago. Athene Global (A1/A+) was the only other G -255 issuer to sell bonds in Europe yesterday, sell €700 FA 3Y bonds.
Systematic Trading Model Indicators and Strategy
Model Output
743 Attractive short recommendations 45 fewer than Monday.
65 attractive long recommendations: 15 fewer than Monday.
Systematic Portfolio Trading Model Recommendation:
Prioritize Long Positions: Focus on deleveraging new issues with attractive valuations. Ideal maturity for long positions is 10 years.
Short Positions: Target re-levering issuers trading at the deepest discount from their model avoid point. Avoid short positions with maturities around 7 years, as they are the least attractive.
Replace Longs: Replace Systematic attractive long positions that have reached their avoid trading level.
Portfolio Trading Hurdle: Once the portfolio reaches a 75% long hurdle, maintain a 1:1 long-to-short ratio for additional positions.
Current Status of trading indicators below:
12 long trades have reached their avoid trading levels in July and thus far, have been replaced by 3 new issue recommendations
Systematic Credit Trading Strategy July 21, 2025
Closed Positions: The model’s last trade exit was the Broadcom (Baa2/BBB) AVGO 5.2 07/15/35 on Wednesday
Enter New Longs: Today the model added: PNC Corp (A3.A) PNC 5.373 07/21/36 last Monday
Monitor Trade Position (Portfolio) Composition:
Track the percentage of long positions relative to the total portfolio.
If replacing the long positions that have reached their avoid trading level pushes the portfolio above the 75% long hurdle, initiate short positions in re-levering issuers (avoiding 7-year maturities) at a 1:1 ratio for any additional long positions.
Review: Reassess portfolio balance after today’s fund flow data to ensure alignment with the systematic model.
Systematic Credit Long/Short Basket Trade
The trading 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 minimizing volatility risk. The model employs only publicly available data.
Current Sample Systematic Basket bond trades based on trading strategy
No new trades this morning
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 21, 2025)
Total Trades: 134 (1% of total trades).
Performance Summary:
Long Recommendations: 93/102 reached avoid-trading levels, tightening by -9.54 bp.
Short Recommendations: 27/31 reached avoid-trading levels, widening by +5.49 bp.
Remaining Longs: 10 tightened by -5.45 bp.
Remaining Shorts: 4 tightened by -15.25 bp.
Average Spread Movement: ±7.64 bp in the recommended direction.
Success Rate: 90% of recommendations reached avoid-trading levels which is normal.
Average trade holding period: (22 trading days) + 17% above 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.