The conflict between Greece's new government and European leaders is escalating and may very well lead to the nation exiting the euro zone.

The bond market's response?

Shrug. Yawn. We've seen this movie before.

During a previous incarnation of Greek debt negotiations in 2011, investors fled riskier European assets. This time, they're buying. Last week alone set a new record for mutual-fund money flowing into the region. Investors poured about US$40 billion into European debt, equity, and commodities funds, including $2.8 billion into euro-denominated corporate-debt funds, according to data compiled by Bank of America Corp. analysts.

And while investors used to punish Italian and Spanish bonds in tandem with Greece, yields on those securities were hovering within 0.1 percentage point of their all-time lows as of Feb. 6. Investors have been calmed by the European Central Bank's plan to buy bonds, and have turned to riskier assets as a swelling proportion of the region's government debt carries negative yields.

As for broader measures, the two-year interest-rate swap spread—a gauge of stress in debt markets—is 0.26 percentage point, a reading that's almost one-third below its decade-long average. Typically, a lower spread indicates less stress. In November 2011, the measure widened to 0.55 point.

In other words, Greek leaders may be riling up Europe's central bankers and other finance chiefs, but they're not having too much of an effect on risk appetite in credit markets worldwide.

“If you look at the world's total debt and you look at their debt, they're 0.3 percent of the world's debt,” Mark Patterson, who co-founded MatlinPatterson Global Advisers, said in a Bloomberg television interview last week. “It can have repercussions for the economy, but there are so many other factors that are more significant,” such as China's growth trajectory and the direction of oil prices, he said.

Of course, markets may be too sanguine and an actual Greek exit would undoubtedly have consequences that aren't being priced in right now.

Investors in Greek bonds are concerned about their prospects after Greek Prime Minister Alexis Tsipras gave a combative speech Sunday in which he vowed to “negotiate an end to the European Union's austerity.”

'Limited Contagion'

Yields on Greece's three-year notes rose to the highest since the country's 2012 debt restructuring while the Stoxx Europe 600 Index dipped less than 1 percent.

Tsipras's remarks didn't go over well with European Union Commission President Jean-Claude Juncker, who said Monday that Greece “cannot expect” that Europe will accept the whole election program of the nation's new leadership.

The muted response in markets is making it easier for European government leaders to take a tough stance this time around as they negotiate with Greece, Deutsche Bank AG analyst Francis Yared wrote in a Feb. 6 report. There's “limited contagion to the periphery and broader market,” he wrote.

So Greek leaders can assert themselves all they want.

Bond traders across the globe, for now at least, are barely flinching.

Instant Insights /

Bond Traders Unimpressed with Greek Drama

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