Euro drops with stocks as Cyprus levy triggers bund, gold rally

Systemic Risk

“The approach of applying haircuts to bank deposits in the Cypriot bailout is driving credit spreads substantially wider,” Greg Venizelos, a fixed-income strategist at BNP Paribas SA in London, wrote today in a report. “Systemic risk has risen as the market contemplates the read-through of breaching the sanctity of deposits.”

While the rate on Portuguese debt due October 2023 rose as much as 30 basis points to 6.25%, that’s only the biggest increase since Feb. 26, when it climbed 48 basis points after the Italian election failed to produce a clear winner. Spanish yields rose 20 basis points on Feb. 26. The yield on Italy’s 10- year bonds added four basis points today, compared with a 41 basis-point jump three weeks ago.

“So far it seems like it’s fairly calm and if it can stay that way that’s good,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The markets are not too scared. It is a big deal but everything depends on what happens within the next couple of days. If we get a deal then it should calm down very swiftly. That’s what I think is going to happen.”

The yield on U.S. 10-year Treasuries slid five basis points to 1.94%. Japan’s 10-year bond yield fell three basis points to 0.596%.

Default Risk

The cost of insuring against default by banks rose the most since Feb. 26, with the Markit iTraxx Financial Index of credit- default swaps on 25 banks and insurers jumping 14 basis points. Italian and Spanish lenders were the worst performers.

“More contagion fears will spread through investors and it will encourage depositors in the European periphery to move their funds to a safer place, either under the pillow or to Germany,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “This is essentially a bail- in of depositors and sets a dangerous precedent.”

The Stoxx 600 declined for a second day as banks and insurers led losses. UniCredit SpA, Italy’s biggest bank, France’s Societe Generale SA and Spain’s Banco Bilbao Vizcaya Argentaria SA dropped more than 4%. Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, rallied 8% in London trading after the Sunday Times reported that the Qatar Investment Authority is considering an 8 billion-pound ($12 billion) takeover.

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