While investors in European bond markets opted for safety and quality following the Greek people's rejection of European Union-imposed austerity measures, performance of these markets shows systemic contagion is not a big concern, said S&P Dow Jones Indices.
As of Monday's close, European government bond markets experienced a flight to the quality and safety of German sovereign bonds, while a sell-off was seen in peripheral Europe bonds.
Heather McArdle, director of fixed-income indexes at S&P DJI, said in a note Tuesday that this was expected. However, the performance of these market indexes indicates contagion is not a huge worry.
The S&P German Sovereign Bond index rallied, and yields tightened three basis points to 0.34% from 0.37% on July 3.
Peripheral bonds widened slightly. The S&P Portugal Sovereign Bond index yield was 2.03% on Monday, vs. 1.93% on July 3, a widening of 10 basis points. The S&P Spain Sovereign Bond index also widened 10 basis points, to 1.55%, while the S&P Italy Sovereign Bond index widened eight basis points, to 1.63%.
Greece itself, however, was a different matter. The S&P Greece Sovereign Bond index widened 453 basis points, to yield 20.74% on Monday.
While financial contagion is not a concern, judging by the numbers, Ms. McArdle warned political contagion could be a problem, with any debt relief or looser austerity measures for Greece setting a precedent for other struggling European economies. “This has serious implications for the euro's stance as a reserve currency,” she wrote. “A growing concern in Europe is a possible shift in power to anti-austerity political parties outside of Greece.”
Ms. McArdle highlighted comments from Portuguese Socialist Party leader Antonio Costa, who is calling for the country to show more solidarity with Greece; and the rise of Spain's anti-austerity party, Podemos. “Spanish elections are set for late fall, and the (European Central Bank's) actions over the next few days will surely be scrutinized,” she wrote.
