Bonds a gauge of Greek exit impact

To judge how well equipped the eurozone is to survive a Greek exit, look no further than the bond market.

The reaction of Italian, Portuguese, and Spanish bonds to a referendum that may decide Greece’s future in the region will gauge investors’ faith in firewalls.

In five months of brinkmanship on Greek debt, losses outside of Greece have been relatively muted.

Although Spanish and Italian bond yields have climbed from record lows as tension in Greece rose, there have been few signs of panic among investors. The biggest daily increase in Spanish 10-year yields in the past two weeks was a 16 basis-point jump on June 15. In 2012, that wouldn’t have been in the top 25 worst days.

What’s changed is the construction of firewalls to guard against contagion, starting with Mario Draghi’s pledge in July 2012 to do whatever it took to save the euro, made the day after the Spanish-German yield spread hit its euro-era high.

Markets are still expected to react negatively today. “Unless something else changes the dynamic significantly over the weekend, the initial reaction by markets [today] would likely be a flight to quality,” said Ajay Rajadhyaksha and Christian Keller of Barclays.

Bloomberg