Do primary dealer funding constraints impact sovereign bond liquidity and yields: evidence for nine Euro area countries

For a sample of nine euro area countries and a period running from 2004 to 2012, we empirically assess the effect of primary dealers' financial constraints on the liquidity and pricing of the sovereign bonds in which these primary dealers make the market. We find that dealers' financial constraints generally led to less liquid sovereign bond markets, with the effect depending on the subperiod under study, the issuer and the dealers' origin. In addition, dealers' financial constraints generally contributed to higher yield spreads, both directly and indirectly through their impact on liquidity.