Guillaume Ouellet Leblanc is a Principal Economist in the Market Risks and Vulnerabilities Division of the Financial Markets Department. Prior to his current role, he held various positions in the Financial Stability and Funds Management and Banking departments. Guillaume holds a M.A. in Economics from the Catholic University of Louvain (Belgium) and the PRM designation.
Staff analytical notes
Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts observed since the start of the year. We also find these market valuations are consistent with the discount rate returning to its pre-pandemic level.
The liquidity management strategies of fund managers, supported by policy measures, have helped bond funds limit the increase in redemptions caused by COVID 19. This avoided further deterioration in liquidity in bond markets. Nevertheless, these funds were left with lower cash buffers, which could make them more vulnerable to additional large redemptions.
Bond dealers have traditionally kept bonds in an inventory until clients buy them. But now, dealers have another way to access bonds for their clients: the exchange-traded fund. We discuss this new way to manage bond dealing and what it might mean for bond markets.
The creation and redemption activity of fixed-income exchange-traded funds listed in the United States has shifted. Funds of established issuers have traditionally exchanged their shares for baskets of bonds. In contrast, young funds managed by new issuers tend to create and redeem their shares almost exclusively in cash. Cash transactions imply that new funds are taking on exposure to liquidity risk. This has implications for financial stability.
Lending to business is central to economic growth because it supports investment by firms. Knowing how market participants view risk in the financial system can give the Bank of Canada information about future growth in business loans. In this note, we look at three market-based risk measures and find that sudden increases in the perception of risk in the Canadian banking system are associated with a weaker outlook for business loans and real gross domestic product.
We introduce a new proxy for measuring corporate bond liquidity, using the price of exchange-traded funds (ETFs) that hold corporate bonds. It measures the average liquidity across 900 corporate bonds every day, many more than other proxies used in previous Bank of Canada analysis. The new proxy nonetheless paints a very similar picture of liquidity conditions and confirms the previous findings: the liquidity of bonds has generally improved since 2010.
We create a hypothetical scenario to study the role bond funds play in intensifying shocks to the financial system. Using data from 2018 and 2007, we find that bond funds play a larger role now than they did in the past.
When redeeming shares for investors, bond fund managers must choose a mix of cash and bond sales to honour their commitments. This note uses machine learning algorithms to uncover new patterns in decisions fund managers make to meet redemptions.
When investors redeem their fund shares for cash, fixed-income fund managers can choose whether to draw on their liquid holdings or sell bonds in the secondary market. We analyze the liquidity-management decisions of Canadian corporate bond mutual funds, focusing on the strategies they use to meet investor redemptions.
Canadian corporate bond mutual funds have rapidly increased in number and size in recent years. Their holdings have also become riskier, increasing their exposures to credit risk, interest rate risk and liquidity risk. We also briefly discuss financial stability implications.
This report provides a detailed technical description of a stress test model for investment funds called Ceto.