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Publication of the monetary policy report: press conference of Governor Tiff Macklem and the first deputy governor Carolyn A. Wilkins. (approximately 11:00 (ET).
These forecasts are for the Governing Council in preparation for financial policy decisions. They are published once a year with a delay of five years.
The COVID-19 pandemic triggered a series of unprecedented events. The measures needed to involve the spread of the virus have disrupted entire industries. Anticipating the effects on their jobs and incomes, Canadian families and businesses began to replace the amount they borrowed and how they invested their savings. The widespread preference for more liquid assets and more liquidity has unbalanced many markets. The repercussions have spread as a contagion throughout the monetary system.
We are interested in how money markets work for investors who own government-issued bonds. These bonds provide Canadian investors and establishments and liquid cars to invest their savings. They can also be used as collateral for transactions in other markets and as a reference for the value of other less liquid bonds. As a result, Canada’s government bond markets are among the most vital and vital elements of our monetary system. However, as the pandemic progressed, negotiating these obligations has become difficult.
To illustrate what happened in the bond markets as a whole, we took a look at a two-year Canadian government bond that had a reference prestige in that period. Benchmark bonds play a special role, attracting the highest volume of transactions and offering lower trading prices (Bulusu and Gungor 2017). A particular Government of Canada bond is designated as a reference after a series of tiered programmes, at which time:
Knowledge implies that what happened to Canadian government benchmark bonds also describes the general trend in bond markets, adding Canada’s loan bond markets, provincial bonds, and U.S. Treasury bonds.
We note that Canada’s government bond market went through 3 stages as the pandemic developed. First, agents responded to the growing demand for liquidity when investors were put on alert. Then, in the moment phase, business situations deteriorated considerably, probably because distributors eventually reduced their liquidity supply. Finally, an era of relative calm followed several interventions through the Bank of Canada in the monetary system. We also note that the same 3 stages occurred in bond markets.
The first covers the weeks of:
During this period, the Canadian Government’s benchmark bond market was tense, but responded well.
Figure 1 shows that the volume of transactions rose particularly in the first week that the contagion began. In the week of the time, trading volumes reached a point higher than the highest price in 2019. In fact, the peak in early March was the highest trading volume ever recorded for the Canadian Government’s two-year benchmark bonds.
One of the reasons for the summit is that the Canadian government’s call for bond negotiations intensified the pandemic. Buyers would possibly have higher holdings of safe bonds and traders would possibly have higher holdings of money. Both types of investors increase the liquidity of their portfolios.
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The volume of the industry followed a similar trend for the Canadian government’s bond market site as total and, surprisingly, for the place of the U.S. Treasury bill market (Figure 2). In addition, Fleming and Ruela (2020) practice a higher volume of transactions in a context of maximum accuracy in the U.S. Treasury bond market. They show that the same 3 stages happened over time in the United States; and the timing of these stages necessarily overlaps with our findings in Canada. Its effects our confidence that those 3 stages provide a useful description of the events.
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Figure 3 shows that the liquidity value increased to compensate the creators of Phase 1 market positions. Like the volume of trades, the liquidity value peaked above the highest point observed in 2019. But unlike the volume of transactions, it remained well below the old level. Maximum. This suggests that the market has worked quite well and has responded to the growing demand for liquidity.
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Using daily business data, Figure 1 shows the network that connects agents and their clients to one of the reference bonds as of March 1, 2016 (Fontaine and Walton 2020). Each connection in this network corresponds to a movement of this legal responsibility of reference from a customer to a distributor. A network with a client and a reseller has a connection; it’s the simplest network. A network becomes more complex as more and more customers and distributors transact and create more connections. The network of two-year reference bond adjustments every day as market situations change.
We need to see how the network has changed from our legal reference responsibility. Figure four shows that the number of links between agents and clients is greater by 50% for this Phase 1 of the bonus. The graph shows that the complexity of the transaction network is also much higher in Phase 1.
The larger and more complex network explains how distributors are responding to the growing demand for negotiation. As the scenario evolves, the dealership negotiates with more consumers and more dealers. Traders are also starting to use a complex combination of repurchases and money transactions to circulate bonuses between buyers and end traders at the end of the trading day. The advertising network becomes more complex as the value of liquidity increases. This suggests that the increased degree of complexity reflects brokers’ reaction to increased demand for investor trading.
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The timing covers the weeks of:
At the beginning of this phase, the volume of the industry was reduced (Figure 1 and Figure 2), but the value of liquidity remained at the top (Figure 3). This suggests that brokers have reduced the source of liquidity and that clients have begun to face demanding situations in bond trading.
Fleming and Ruela (2020) point out that the worst was of lack of liquidity for U.S. Treasury bonds occurred in the same time period, with significant innovations thereafter. In line with this, Table Four shows a marked minimization in complexity and number of links in broker networks, reversing the accumulation observed in the first phase of the crisis. In the unreported results, knowledge shows that this relief is not unusual among brokers and not because one or a few brokers particularly reduced their trades while others kept theirs.
A potentially vital explanation for which agents particularly reduced their source of liquidity is that they faced difficult financing conditions. In fact, this period, the Bank announced several political movements to help the monetary formula (details on this can be found on the Bank’s website):
It is interesting to note that liquidity situations did not worsen any more in Phases 2 and 3. This would possibly be a sign that these announcements and upcoming bank announcements have stabilized situations in the Canadian government bond market. However, immediate relief in the length and complexity of broker networks has brought some other problems. The cascades of confusion in the agreements have become widespread (Figure 5). Settlement errors are unforeseen delays that occur when an operator does not deliver values. These fail infrequently cascading in a network of transactions when counterparties that do not earn bonuses do not deliver them. Fontaine and Walton (2020) show that networks of giant and complex brokers are exposed to widespread agreement errors when market situations replace or big news hits the market. Adjusting to these adjustments has become more complicated as runners have moved their operations to relief sites and many workers have begun to flee from home.
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The last phase covers the weeks of:
During this period, the volume of the industry returned to a higher point than the general point in early 2020 (Figure 1 and Figure 2). More importantly, the liquidity value reversed the maximum of the increases observed in the first week and stabilized at a higher point than overall (Figure 3). This suggests that agents are now responding to liquidity demands at higher moderate prices than before the crisis began. In fact, the complexity and number of links in broker networks has returned to general levels and the number of errors in the agreements has been reduced to a maximum of zero.
Following the trail of an undeniable bond has the merit of simplicity. However, the same finish can be observed for maximum active bonds in Canada. The end in the total transaction volume of all Government canada bonds is similar in the 3 stages (Figure 6). The maximum trading volume of these bonds at the end of the first phase was at most 50% higher than the highest price in 2019 ($53 billion). This reinforces the concept that, first, the markets reacted well.
The same general trend is evident in the overall trading volume of all Canadian loan bonds and all provincial bonds. Provincial bonds have a maximum trading volume in Phase 1 – $5.8 billion compared to $4.2 billion in 2019 – and a decrease in Phase 2. One small difference is that the recovery of provincial bonds seems to begin later than the recovery of the Government of Canada. which may be caused by the Bank’s liquidity interventions to help provincial bond markets. However, the volume of provincial bond transactions is also recovered in the 3rd phase.
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We use the two-year benchmark to provide a high level of how Canada’s government bond markets have evolved as the COVID-19 crisis unfolded. The effects of this training recommend that the scenario has progressed in 3 phases.
The first phase saw a dramatic increase in demand for liquidity, which traders largely still met at a higher liquidity price. The phase at the moment saw immediate relief in the distributors’ source of liquidity and an inadequate source to absorb demand. Finally, in the 3rd phase, brokerage networks, business activity and liquidity costs stabilized as a result of Bank of Canada’s interventions in the monetary system.
This relative recovery trend is also evident in the broader bond markets in Canada and the United States.
The Bank of Canada’s analytical notes are brief articles aimed at existing problems applicable to the existing economic and monetary environment, produced independently of the Bank’s Governing Council. These paintings would possibly challenge prevailing political orthodoxy. Therefore, the perspectives expressed in this note are only those of the authors and possibly differ from the official prospects of the Bank of Canada. No duty to them deserves to be assigned to the Bank.