Size Matters

The purpose of this paper is to investigate the determinants of sovereign bond market liquidity across EU member states, with particular attention to the role of market size. Using panel data for 26 EU countries over the period 2022–2024H1, the analysis applies Hansen’s threshold regression methodology to test for nonlinearities in the debt–liquidity relationship. The results identify a statistically significant threshold of approximately EUR 92 billion in outstanding debt, above which liquidity dynamics become self-reinforcing, and market size emerges as thedominant driver. Liquidity below this threshold is influenced more by structural and fiscal fundamentals, such as the composition of debt and the quality of sovereign credit. The findings confirm that liquidity is scale-dependent and regime specific, with important implications for debt management and policy design. The study concludes that strategies to enhance liquidity must be differentiated: large markets rely on sustaining scale, while smaller ones require institutional and structural measures.