US-BASED State Street pulled out of British government bond auctions yesterday, a sign banks are shying away from markets they once queued up to support and a potential new stress for countries struggling to raise money.

Although the number of banks taking part in bond auctions has risen sharply in the past few years, many are now reassessing the risks they absorbed as the price of good relations with governments.

State Street blamed tighter financial regulation making the bond market a tougher place to make money, but the move also comes as the European debt crisis increases the risk of being left holding unsold sovereign bonds, and as banks are forced to become more cautious.

Banks designated as a primary dealer – known as a gilt-edged market maker in Britain – commit to buying a certain percentage of government-issued bonds in return for a guaranteed chance to participate in the auction.

A State Street spokeswoman said increasing regulation such as the Volcker rule – which prohibits US banks from gambling on financial markets with their own capital – was making bond trading a much harder business. – (Reuters)