Systematic credit trading overview and model indicators
18 July 2025 - Not recommendations
This report is generated via a systematic credit model. Outputs are available, please contact: Larry Domash
Bloomberg: ldomash8@bloomberg.net
Curve Publishing e-mail: larry.domash@curveresearch.com
LinkedIn: www.linkedin.com/in/larry-domash-949284302
Good morning and there is large M&A news via Union Pacific Corp (UNP, A3/A-, attractive short) and Norfolk Southern (NSC, Baa1/BBB+, attractive short) which given the current global trade negotiations would be material both to the US economy and corporate earnings if consummated.
Thursday credit trading was enthusiastic post successful new supply from 4 US banks (2 de-levering and 2 re-levering) post earnings. Thus far, new bond issuance has been sparse in USD.
24 issuers have reported 2Q results thus far. 3 have yet to provide their balance sheet data. 9 are de-levering. 3 of the 24 issuer systematic trading indicators have reversed. 2 attractive long have have flipped to attractive short and 1 attractive short has flipped to attractive long.
Thus far, Big 6 banks are the only sector to report results and from a balance sheet perspective
The 6 banks added $130 billion of net debt quarter over quarter and $400 billion YoY. In the past 12 months the 6 bank have added $267 billion of short-term + long-term debt. We will have more as time and space permits. However, the initial observations about the re-levering of the world’s largest corporate balance sheets has been pronounced.
Musical Fed Chairs
Thus far we have gleaned from the 23 issuers that have reported that US trade negotiations have yet to materially impact revenues or earnings. Of course, we have yet to hear from the global auto makers or the pharmaceutical issuers.
We are also reading multiple stories about replacing Fed Chair Powell through some type of executive action prior the end of his term next May. At the same time, we are seeing several current Fed Governors audition for Powell’s post. “Christopher Waller said policymakers should cut interest rates to support a labor market that is showing signs of weakness” according to Bloomberg.
Say what? As the economic data released Thursday depicts, while June private sector payrolls were weak according to ADP, current Fed survey and weekly jobless claims data argues differently (please see below). So why would a Federal Reserve Governor argue to lower rates with 4.1% unemployment rate, declining weekly jobless claims and Fed surveys indicating higher input and output prices?
Stimulating the economy without seeing exactly how the trade tariffs once implemented impact prices and employment would lead to more uncertainty and impact the trade negotiations.
As we head into the weekend, we have 6 more issuers reporting today and 46 more next week (14 are non – US issuers). Danske Bank reported this morning and continues to de-lever.
G – 255 Issuers reporting results Friday
Danske Bank (DANBNK, A-/BBB+ attractive long) Reported
Charles Schwab (SCHW, A2/A- attractive long) Bef-mkt Q2 25
Truist Financial (TFC Baa1/A- attractive long) Bef-mkt Q2 25
Huntington Bancshares (HBAN Baa1/BBB attractive short) Bef-mkt Q2 25
American Express (AXP A2/A- attractive long) 07:00 Q2 25
Ally Financial (ALLY Baa3/BBB- attractive short) 07:30 Q2 25
Systematic Trading Model Insights and Strategy
The Systematic Trading Model creates trading indicators for over 6,000 bonds daily. Currently, 773 bonds are within 20% of their 52-week tight or wide spread levels, 39% above historical averages. Yesterday’s trading saw Single A rated credit spreads move wider from 52 week tight spreads. Thursday’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 133 long/short trades in 2025 (marked to market via TRACE), 90% achieved ±5 bp targets, averaging ±7.62 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 this 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
June retail sales rose 0.6% compared to May. Retail sales less autos & gas rose 0.6%
Initial jobless claims for the week ended July 12 rose 5k YoY. The 4 week moving average (229.5k) is -4k lower than the same week a year ago.
Philadelphia Fed July Index rose to 15.9 vs -4 in June.
-New orders rose to 18.4 vs 2.3
-Shipments rose to 23.7 vs 8.3
-Unfilled orders fell to 5.7 vs 9.3
-Delivery time fell to -4.7 vs 13.6
-Inventories fell to -1.3 vs 3.6
-July prices paid rose to 58.8 vs 41.4
-Prices received rose to 34.8 vs 29.5
-Employment rose to 10.3 vs -9.8
Thursday’s U.S. Credit Trading
Investment-Grade (IG) Trading
-Volume: +17% above average
-G-255 Issuers: 96 of the top 100 traded issuer bonds accounted for 97% of top 100 issuer volume and 78% of total TRACE volume.
High-Yield (HY) Trading
-Volume: +9% above average
-G-255 Issuers: 15 of the top 25 traded bonds accounted for 60% of top 25 issuer volume and 55% of total TRACE volume.
Market Movement
U.S. CDX Index: tightened by (-1.1bp) @ 50.9 bp
U.S. IG Cash Spreads: Ranged from (+3bp) wider to -3bp tighter; Single financials outperformed while Single A healthcare was wider.
CDX HY Index: closed +.3pt higher @ 107.5 (per Bloomberg)
HY Cash Bonds: BB Utilities outperformed while BB TMT and BB financials underperformed.
High-Yield Activity
- End User bought $ 100 million of HY bonds Thursday.
Most Bought HY Bonds
- Charter Communications (CHTR Ba1/BBB- attractive long)
Most Sold HY Bonds
- New Issue Century Aluminum (CENX B3/B)
Investment-Grade Activity
- End users were neither buyers or sellers Thursday.
Most Sold Sector: BBB TMT
- Broadcom (AVGO, Baa1/BBB attractive long)
- T - Mobil (TMUS, Baa2/BBB attractive short)
Most Bought Sector: Energy
- Enterprise Products (EPD A3/A- attractive short)
- BP (BPLN A1/A- attractive short)
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
1354 bonds ($1.36 trillion) are considered overvalued by the stochastic credit trading model with 714 attractive short trade indicators for the entire 6,000 bond universe.
U.S. Big 6 Banks (All Ratings): $714 billion in overvalued market capital across 284 bonds, with 162 short recommendations.
BBB TMT $217 billion in overvalued market capital across 130 bonds, with 49 short recommendations.
Single A and BBB industrials $151.8 billion in overvalued market capital across 122 bonds, with 69 short recommendations.
Single A and BBB energy $181. 7 billion in overvalued market capital across 133 bonds, with 78 short recommendations.
Issuer News
Union Pacific Corp (UNP, A3/A-, attractive short) is exploring an acquisition of Norfolk Southern Corp (NSC, Baa1/BBB+, attractive short), according to people familiar with the matter. A deal would merge the No. 1 and No. 5 North American railroads by revenue, companies with a combined market value of nearly $200 billion.
Union Pacific Chief Executive Officer Jim Vena and Norfolk Southern's Chief Financial Officer Jason Zampi have expressed support for a merger, with Vena stating it would be beneficial for the country and Zampi noting there would be significant benefits.
Union Pacific reports results on July 24. Norfolk Southern reports on July 29.
U.S. IG Credit Valuation and Spreads
Credit Spread Recovery: U.S. credit spreads have recovered 47% 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 +17 bp higher YoY and +3.2bp higher YTD
Global Equity Correlation to IG Credit Spreads
U.S. IG credit spreads and U.S. equity prices correlated directionally for 56th trading day in 64. 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
On Wednesday, JP Morgan (JPM, A3/A-) and Citigroup (C, Ba1/BB-) issued lower-tier bonds. On Thursday, PNC Corp (PNC) and Morgan Stanley (MS) issued five bank note deals totaling $7.3 billion and one senior holdco note for $1.5 billion. The new deals on Thursday were priced attractively according to the credit trading model, consistent with Wednesday’s bond supply.
Similar to Wednesday’s supply both new deals were more than fairly priced and seen as attractive by our trading model.
Citigroup (C, A3/BBB+, attractive long) and Wells Fargo (WFC, A1/BBB+) issued euro-denominated bonds during the week. No G-255 supply was recorded in Europe on Thursday.
US Fund Flows (Week Ended July 16, 2025) According to LSEG Lipper, US fund flows for the week ended July 16, 2025, showed inflows across various asset classes:
Short and intermediate investment-grade bonds: $1.25 billion inflow, compared to $1.82 billion inflow
High-yield notes: $868 million inflow, compared to $303.6 million outflow.
Treasuries: $2.25 billion inflow, compared to $776.7 million inflow.
US leveraged loans: $490 million inflow, compared to $565 million inflow.
Mortgage-related: $225.2 million inflow, compared to $661.7 million inflow.
Net inflows to ETFs totaled $6.47 billion for the week ended July 15, 2025.
Corporate bond funds and ETFs have recorded net inflows in 8 of the last 9 weeks.
Systematic Trading Model Indicators and Strategy
Model Output
Attractive short recommendations 714. 15 fewer than Thursday.
59 attractive long recommendations: 15 fewer than Thursday.
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 18, 2025
Closed Positions: The model exited the Broadcom (Baa2/BBB) AVGO 5.2 07/15/35 on Wednesday
Enter New Longs: Today the model adds: PNC Corp (A3.A) PNC 5.373 07/21/36
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
This morning the Our trading model sees the PNC Corp (A3.A) PNC 5.373 07/21/36 new issue as the attractive at current levels
Systematic Long/Short Basket Trade Performance Report (January 4, 2025 – July 17, 2025)
Total Trades: 133 (1% of total recommendations).
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: 9 tightened by -4.72 bp.
Remaining Shorts: 4 tightened by -14.75 bp.
Average Spread Movement: ±7.62 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.