Goldman Says Low Liquidity Raises Europe’s Bond-Trading Costs

Europe’s money and debt markets are less liquid than their U.S. counterparts, resulting in higher transaction costs, according to Goldman Sachs Group Inc.

“This is the case even in sovereign-debt markets, which before the financial crisis and the ECB’s sovereign purchases were seen as the most liquid segment of the euro-financial markets,” Goldman Sachs analyst Alain Durre wrote in a research note dated April 16.

Banks have played a stronger role in Europe in determining market liquidity than in the U.S. Increased regulations on the industry may worsen the situation, Durre said in the report.

Liquidity is crucial for financial markets to function effectively as it allows investors to trade assets with limited impact on prices, and many borrowers to raise money in the market when they need.

“With the expansion of bank balance sheets becoming more expensive owing to regulatory changes, the liquidity of European markets may be threatened,” according to the report.

Quoted spreads, a gauge of market depth based on the difference between bid and offer prices, are higher even in bonds from the euro region’s biggest issuers including Germany, France and the Netherlands, than in the U.S., according to the report.

While the debt turmoil in Europe, triggered by Greece in 2009, has increased both spreads and price swings, these two metrics were already higher than their U.S. equivalents before the crisis, Goldman said.

The spread is not necessarily related market size. The government bond markets in the U.K. and Canada are smaller than that of the euro-region where the five biggest countries together have outstanding debt of around 5.5 trillion euros ($5.9 trillion). Yet, the difference between their bid and ask prices is similar or smaller, Goldman found.

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