Regulations aimed at reducing the risk of another financialcrisis are starting to upend a key part of the bond market thatexpedites trading in everything from Treasuries to junk bonds.

The U.S. repurchase, or repo, market where banks and investorsborrow and lend Treasuries and other fixed-income securities shrunkto $4.6 trillion daily outstanding last month, down 35 percent froma peak of $7.02 trillion in the first quarter of 2008, based onFederal Reserve data compiled from its 21 primary dealers.

From fewer repos to lower inventories of bonds, financialinstitutions are responding to more stringent capital standards imposed by regulators around the world.Already, the group of dealers and investors that advise the U.S.Treasury say that they see declines in liquidity in times of marketstress, including wider gaps between bid and offer prices and thespeed of completing trades. The potential consequences are higherborrowing costs for governments, companies, and consumers.