In fixed-income markets, traders often lean on inflation, employment, and growth figures to guide their decisions. But one powerful signal is frequently overlooked: local-currency import growth. This indicator, though underappreciated, offers significant predictive value for bond returns across maturities and geographies. Over the last two decades, trends in merchandise imports have quietly anticipated moves in swap rates, yield curves, and cross-country bond spreads—making them a hidden gem for portfolio strategy.
Why Import Growth Matters for Fixed-Income
Though not directly tied to central bank mandates, import growth captures three crucial macroeconomic forces: domestic demand, inflationary trends, and currency strength. When imports rise sharply, it’s often a sign of expanding consumption and price pressures. These developments tend to influence monetary policy and, in turn, bond markets.
Consider this: a surge in imports may suggest overheating demand or rising inflation, both of which typically trigger tighter monetary policy and falling bond prices. Conversely, weak import data could point to subdued demand and deflationary forces—conditions that favor longer-duration positions.
Building a Signal from Import Data
To evaluate this theory, analysts compiled import growth metrics from 25 major currency areas, including the U.S., Eurozone, U.K., Japan, China, and others. Import growth was calculated in three time frames—three-month, six-month, and twelve-month annualized rates—using data adjusted for seasonality and calendar effects.
These figures were then compared to prevailing interest rate swap (IRS) yields to determine whether import growth was excessive or subdued. The difference between import growth and nominal yields serves as a proxy for economic heat: high positive gaps suggest conditions ripe for rate hikes, while negative gaps may signal economic slack.
The result is a normalized score (z-score) that expresses import growth relative to each market’s historical context. These scores were used to predict returns on 2-year and 5-year IRS receiver positions and curve trades across the selected countries.
Forecasting Returns with Import Signals
Analysis revealed that when import growth exceeded its “neutral” level, future IRS receiver returns—particularly at the 2-year maturity—tended to be negative. This aligns with the idea that strong imports signal tighter monetary policy ahead.
Panel regressions across the 25 countries confirmed a highly significant relationship between import scores and subsequent bond returns. Prediction accuracy for monthly 2-year IRS returns stood at nearly 54%, with precision on both positive and negative signals exceeding the 50% threshold. The effect was present, albeit weaker, for 5-year IRS contracts, reflecting the shorter-term nature of import-driven economic shifts.
Importantly, this predictive power translated into strong trading results. A naïve strategy based on import scores produced a Sharpe ratio of 1.4 over 22 years—an impressive result for a single macro signal. Notably, this strategy was uncorrelated with equity markets and performed best during periods of economic stress, such as the 2020 pandemic shock.
Enhancing Curve Strategies
Beyond directional bets, import growth also informed curve positioning. When imports rose sharply, the curve tended to flatten, reflecting expectations of a hawkish near-term policy stance. Here, returns were measured as the difference between vol-targeted positions in 5-year and 2-year swaps.
The data showed that strong import scores were followed by flattening curve returns. Though slightly less significant than outright duration forecasts, the Sharpe ratio for this curve-flattening strategy was a solid 0.84, again with low equity market correlation.
Relative Value Insights Across Countries
The import signal also proved valuable in cross-market strategies. When one country’s imports outpaced those of others, its bond market generally underperformed. This finding held true across maturities and time frames, suggesting that relative import growth is a robust indicator of monetary divergence.
While accuracy dipped slightly for these relative trades—unsurprising given cross-country differences in data and structure—the economic value remained high. A strategy focused on relative 2-year duration returns produced a Sharpe ratio of 1.0, while the 5-year version came in at 0.9. These approaches also displayed less seasonality than directional strategies, adding stability to their appeal.
Practical Considerations and Drawbacks
Despite its strengths, an import-based strategy has limitations. Global trade patterns are highly synchronized, meaning diversification across countries is limited. Additionally, the signal thrives on volatility—it needs economic dislocation to generate strong readings. In calm periods, performance can wane.
Still, when used as an overlay on a broader fixed-income portfolio, the strategy provides both diversification and drawdown protection. It also aligns well with macro fundamentals, making it a compelling tool for tactical duration management.
Final Thoughts
Import growth may not be the first place fixed-income investors look for signals—but perhaps it should be. As this research shows, changes in local-currency merchandise imports can reveal a great deal about future bond returns. Whether for outright positions, curve trades, or cross-market plays, import trends offer timely insight into the macro forces shaping interest rate markets.