Jean-Sébastien is a Senior Research Advisor in the Financial Markets Department. His research covers a range of topics in US and Canadian fixed income markets, including the economic determinants of long-term interest rates, the interaction between repo and spot bond markets as well as the role of funding conditions for market liquidity.  Jean-Sébastien received his PhD in economic from the Université de Montréal.

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Staff analytical notes

What cured the TSX Equity index after COVID-19?

The TSX index rose by 9.5 percent in November 2020, adding large gains to an already sharp V-shaped recovery. The economic outlook improved at that time as well. We ask whether the stock market gains since last autumn are due to improving forecasts of firms’ earnings.

Canadian stock market since COVID‑19: Why a V-shaped price recovery?

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.

Will exchange-traded funds shape the future of bond dealing?

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.

COVID-19 and bond market liquidity: alert, isolation and recovery

Staff Analytical Note 2020-14 Jean-Sébastien Fontaine, Hayden Ford, Adrian Walton
The disruption due to COVID-19 reverberated through the bond markets in three phases. In the first phase, dealers met the rising demand for liquidity. In the second, dealers reduced the supply of liquidity, and trading conditions worsened significantly. Finally, the market returned to relative stability following several interventions by the Bank of Canada.

Relative Value of Government of Canada Bonds

Staff Analytical Note 2019-23 Jean-Sébastien Fontaine, Jabir Sandhu, Adrian Walton
Government of Canada bonds in circulation that promise very similar payoffs can have different prices. We study the reason for these differences. Bonds that trade more often and earn high rental income in the repurchase agreement (repo) market tend to have higher prices. Bonds with longer tenors and times to maturity tend to have lower prices. This contrast between cheap and expensive bonds is important because trading volume and rental income can change rapidly, unlike tenor and time to maturity, which are stable.
Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets JEL Code(s): G, G1, G10, G11, G12, G2, G23, G3, G32

Price Caps in Canadian Bond Borrowing Markets

Price controls, or caps, can lead to shortages, as 1970’s gasoline price controls illustrate. One million trades show that the market for borrowing bonds in Canada has an implicit price cap: traders are willing to pay no more than the overnight interest rate to borrow a bond. This suggests the probability of a shortage increases when interest rates are very low.
Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets JEL Code(s): G, G1, G10, G12

The Secular Decline of Forecasted Interest Rates

Staff Analytical Note 2019-1 Bruno Feunou, Jean-Sébastien Fontaine
Canadian interest rates show a secular decline since the 1980s. Long-term survey-based forecasts of interest rates also declined, but less so and were more gradual. Our model-based estimates show an endpoint shifting over time in three phases: a decline between 1990 and 1995, a period of stability between 1996 and 2007, and a further decline since 2008. The current endpoint estimate remains clouded with uncertainty; this is an active area of research.
Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Interest rates JEL Code(s): E, E4, E43, G, G1, G12

The Impact of Surprising Monetary Policy Announcements on Exchange Rate Volatility

We identify a few Bank of Canada press releases that had the largest immediate impact on the exchange rate market. We find that volatility increases after these releases, but the effect is short-lived and mostly dissipates after the first hour, on average. Beyond the first hour, the size of the effect is similar to what we observe for other economic releases, such as those for inflation or economic growth data.

The Share of Systematic Variations in the Canadian Dollar—Part III

Staff Analytical Note 2018-13 Guillaume Nolin, James Kyeong, Jean-Sébastien Fontaine
We draw a parallel between the dramatic increases of systematic variations in exchange rates and international bank lending. We find that when a country’s currency has a larger share of systematic variations, lending flows by international banks to that country become more sensitive to global lending - they also become more systematic. This parallel is particularly prevalent for large commodity exporters, including Canada. Global financial intermediation may open a new channel between the real economy and exchange rates.
Content Type(s): Staff research, Staff analytical notes Topic(s): Exchange rates JEL Code(s): F, F3, F31

Do Liquidity Proxies Measure Liquidity in Canadian Bond Markets?

Staff Analytical Note 2017-23 Jean-Sébastien Fontaine, Jeffrey Gao, Jabir Sandhu, Kobe Wu
This analytical note evaluates the reliability of proxies for measuring liquidity in Canadian bond markets. We find that price-impact and bid-ask proxies paint a similar picture of evolving liquidity conditions to that obtained from richer measures of liquidity for benchmark Government of Canada bonds.
Content Type(s): Staff research, Staff analytical notes Topic(s): Debt management, Financial markets JEL Code(s): G, G1, G12, G14, G2, G23, G3, G32

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Staff discussion papers

COVID-19 Crisis: Lessons Learned for Future Policy Research

One year later, we review the events that took place in Canadian fixed-income markets at the beginning of the COVID-19 crisis and propose potential policy research questions for future work.

Repo Market Functioning when the Interest Rate Is Low or Negative

Staff Discussion Paper 2017-3 Jean-Sébastien Fontaine, James Hately, Adrian Walton
This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively.

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Staff working papers

Secular Economic Changes and Bond Yields

Staff Working Paper 2021-14 Bruno Feunou, Jean-Sébastien Fontaine
We investigate the economic forces behind the secular decline in bond yields. Before the anchoring of inflation in the mid-1990s, nominal shocks drove inflation, output and bond yields. Afterward, the impacts of nominal shocks were much less significant

Contagion in Dealer Networks

Staff Working Paper 2020-1 Jean-Sébastien Fontaine, Adrian Walton
Dealers connect investors who want to buy or sell securities in financial markets. Over time, dealers and investors form trading networks to save time and resources. An emerging field of research investigates how networks form.

What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?

We study settlement fails for trades in the Government of Canada bond market. We find that settlement fails do not occur independently. Using a novel and comprehensive dataset, we examine three drivers of fails.

Measuring Limits of Arbitrage in Fixed-Income Markets

Staff Working Paper 2017-44 Jean-Sébastien Fontaine, Guillaume Nolin
We use relative value to measure limits to arbitrage in fixed-income markets. Relative value captures apparent deviations from no-arbitrage relationships. It is simple, intuitive and can be computed model-free for any bond.

What Fed Funds Futures Tell Us About Monetary Policy Uncertainty

Staff Working Paper 2016-61 Jean-Sébastien Fontaine
The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a “path” factor signaling information about future policy actions, which is filtered from federal funds futures data.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, E44, E47, G, G1, G12, G13

Tractable Term-Structure Models and the Zero Lower Bound

We greatly expand the space of tractable term-structure models. We consider one example that combines positive yields with rich volatility and correlation dynamics. Bond prices are expressed in closed form and estimation is straightforward.

Funding Liquidity, Market Liquidity and the Cross-Section of Stock Returns

Staff Working Paper 2015-12 Jean-Sébastien Fontaine, René Garcia, Sermin Gungor
Following theory, we check that funding risk connects illiquidity, volatility and returns in the cross-section of stocks. We show that the illiquidity and volatility of stocks increase with funding shocks, while contemporaneous returns decrease with funding shocks.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets JEL Code(s): E, E4, E43, H, H1, H12

Bond Risk Premia and Gaussian Term Structure Models

Staff Working Paper 2014-13 Bruno Feunou, Jean-Sébastien Fontaine
Cochrane and Piazzesi (2005) show that (i) lagged forward rates improve the predictability of annual bond returns, adding to current forward rates, and that (ii) a Markovian model for monthly forward rates cannot generate the pattern of predictability in annual returns.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Interest rates JEL Code(s): E, E4, E43, E47, G, G1, G12

Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy

Staff Working Paper 2012-41 Jean-Sébastien Fontaine
Most central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions and they do not distinguish between dates with and without scheduled announcements.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, E44, E47, G, G1, G12, G13

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Bank publications

Bank of Canada Review articles

May 11, 2017

Unconventional Monetary Policy: The Perspective of a Small Open Economy

How do unconventional monetary policies like quantitative easing and negative interest rates affect domestic financial conditions and the broader economy in small open econo-mies, such as Canada? These policies are effective in depreciating the exchange rate in small open economies, while lower interest rates are also passed through to the economy, albeit only partially. When conventional monetary policy is close to its limits, fiscal policy may be a more important complement to monetary policy in a small economy, particularly if global demand for safe assets compresses long-term interest rates.
November 15, 2012

Access, Competition and Risk in Centrally Cleared Markets

Central counterparties can make over-the-counter markets more resilient and reduce systemic risk by mitigating and managing counterparty credit risk. These benefits are maximized when access to central counterparties is available to a wide range of market participants. In an over-the-counter market, there is an important trade-off between risk and competition. A model of an over-the-counter market shows how risk and competition could be influenced by the incentives of market participants as they move to central clearing. In a centrally cleared market, there may be less risk when participation is high. This helps to explain why regulators have put in place requirements for fair, open and risk-based access criteria.

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Financial System Review articles

June 9, 2016

Securities Financing and Bond Market Liquidity

This report investigates how the markets for repurchase agreements and securities-lending agreements support the liquidity of Canadian bond markets. It also discusses how recent regulatory changes, as well as low interest rates and settlement failures, are potentially affecting securities-financing markets and, as a result, bond market liquidity.

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Journal publications



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