In the complex world of asset allocation, investors are constantly searching for signals that help them tilt toward equities or fixed income at the right time. Among the more overlooked, yet surprisingly effective tools are bank lending surveys—quarterly assessments of credit conditions and demand reported by major central banks. These surveys reveal important shifts in credit availability and appetite, both of which hold powerful implications for equity and bond returns.
Understanding the Macro Context
Bank surveys provide insight into two key areas: credit demand (from businesses and households) and credit supply (reflected in lending standards). When demand for credit is growing and banks are loosening standards, it typically signals stronger economic momentum and greater appetite for leverage. These conditions tend to favor equities, as corporate earnings prospects improve and financial institutions benefit from rising loan volumes.
On the flip side, signs of slowing demand or tighter credit standards can point to an economic slowdown or financial tightening. These shifts may lead to lower interest rates or accommodative central bank actions, benefiting longer-duration fixed income assets like interest rate swaps and government bonds.
Historical Performance: Equities vs. Bonds
To evaluate the predictive power of these surveys, we examine data from five developed markets—the U.S., euro area, Japan, U.K., and Canada—since the early 2000s. Using volatility-adjusted positions across equity indices and five-year interest rate swap receivers, we find that both asset classes have posted similar long-term returns, albeit at different times. Equities excelled during economic expansions, while bonds performed best during financial crises and periods of aggressive monetary easing.
This divergence makes the case for dynamically allocating between the two based on prevailing credit conditions.
How Survey Data Is Standardized and Aggregated
The analysis uses point-in-time survey data from central banks, standardized by historical norms to ensure comparability across countries. Credit demand and supply signals are aggregated into a single metric for each based on the GDP-weighted contributions of each region. Notably, Canada only contributes supply data, as it does not survey credit demand.
Over the past two decades, these survey-based indices have tracked several distinct credit cycles. While demand and supply often move together, their short-term behavior differs, making it valuable to analyze each separately when forming expectations.
Implications for Equity Markets
Regression results show that rising credit demand is a statistically significant predictor of higher equity returns in the following month. The correlation remains robust across multiple markets and persists even after controlling for biases in market performance. Directional accuracy—the percentage of times the signal correctly predicts market movement—hovers around 56%.
Credit supply conditions show similar predictive strength for equities, although the underlying economic interpretation is slightly more complex. In general, easier lending terms are good news for equity markets, unless they reflect policy responses to already deteriorating conditions.
When put to work in trading strategies, signals derived from these survey metrics have yielded profitable equity allocations. Simple strategies—whether proportional to signal strength or based on binary positioning—deliver Sharpe ratios of around 0.3 to 0.4, uncorrelated with broader market indices. Notably, these signals were most effective during times of financial stress and recovery, such as the early 2000s and the post-2008 crisis period.
Applying the Signals to Bonds
In fixed income, particularly five-year swap receivers, the relationship with credit survey data is more muted but still present. Diminished credit demand generally leads to higher bond returns, consistent with expectations of looser monetary policy. While the correlation is statistically significant, it’s weaker than in the equity market, and credit supply indicators appear less reliable for forecasting bond returns.
Despite the more modest impact, incorporating credit demand into fixed income positioning still adds value. Naïve portfolios based on survey signals achieve Sharpe ratios in the 0.4 range, though the results are sensitive to signal interpretation and strategy construction.
Relative Performance: Equity vs. Bonds
Perhaps the most interesting application of bank lending data is in predicting the relative performance of equities versus bonds. Here, survey data is especially useful, with loan demand scores strongly correlating with equity outperformance relative to duration assets. This relationship has shown greater statistical strength than in the standalone asset class predictions, with directionally correct forecasts in approximately 57% of cases.
Supply scores also work in this context but with slightly less statistical certainty. Still, both contribute to relative allocation decisions and offer value in environments marked by shifting monetary regimes or credit cycles.
Strategic Applications
Using these insights, investors can construct a flexible equity-over-duration strategy, modulated by bank lending conditions. When surveys signal strong credit momentum, the strategy would overweight equities and reduce bond exposure. Conversely, signs of tightening credit would lead to scaling back equity risk and increasing fixed income positions.
This dynamic overlay adds significant performance value. Backtested results suggest that such a managed portfolio could achieve Sharpe ratios between 0.3 and 0.5—substantially higher than a static allocation, which averages closer to 0.1. The benefit is especially pronounced in environments with high inflation and low real rates, where the relative merits of equities and bonds can shift quickly.
Final Thoughts
Bank lending surveys offer a window into the credit environment that is both timely and forward-looking. When used systematically, they provide a unique edge in predicting asset class performance—both individually and in relative terms. While not a silver bullet, their value lies in complementing other indicators and enhancing tactical allocation during volatile or uncertain economic periods. As markets continue to react to shifts in monetary policy and financial conditions, these underappreciated tools may prove even more essential to forward-thinking investors.
