LONDON, June 26 (Reuters) - Average daily trading volumes in European government bond markets fell almost 18 percent year-on-year in the first quarter, dragged down by sharp declines in German and French markets, trade association AFME said on Tuesday.
European trading activity has been hit in recent years as tighter regulation strains banks’ market-making, while bond issuance in big markets falls and the European Central Bank’s stimulus scheme sucks up bonds, squeezing volumes.
In Germany, the euro zone’s benchmark bond issuer, average daily trading volumes declined 20 percent year-on-year in the first quarter, while in France, they fell 33 percent, the Association for Financial Markets in Europe said.
The German and French declines were partially offset by a 54 percent rise in bond trading volumes in Italy, the bloc’s biggest bond market in terms of outstanding debt.
Still, overall trading volumes across European Union bond markets fell 17.6 percent year-on-year in the first quarter, versus a decline of 20 percent in the fourth quarter of 2017.
Compared on a quarterly basis, Europe’s bond market trading volumes rose 17 percent in the first quarter, an increase AFME said was due to seasonal factors, since trading tends to pick up at the start of the year.
But overall, data for the fourth quarter of last year and the first quarter of 2018 suggested a longer-term decline in trading volumes, it said.
The number of primary dealers in European bond markets decreased slightly in the year to May after Scotiabank last month exited its role as a primary dealer in Britain, AFME said.
Primary dealers are banks that buy bonds directly from the government and sell them on in secondary markets, helping to create liquid markets.
The average number of primary dealers across the EU dropped to 15.4 in May, from 15.5 in January 2018, AFME said, adding that uncertainty following Italy’s inconclusive election in March ended a convergence of credit default swap spreads in southern Europe.
The cost of insuring exposure to Italy’s sovereign debt spiked last month on fears of snap elections that could turn into a de facto referendum on Italy’s euro membership. While credit default swaps have slipped since then, they remain well above levels where they began 2018. (Reporting by Dhara Ranasinghe Editing by Alexander Smith)