After initially falling after the latest bailout deal for Cyprus, the safe-harbor Treasury bond market clawed back most of the price losses as euphoria faded.
The benchmark 10-year Treasury note was 1/32 lower in price in recent trading, yielding 1.918%, according to Tradeweb. Bond prices and yields move in opposite directions. The yield fell from a session high of 1.974%.
The deal prevents the collapse of the island nation's banking system and for the moment eased fears over a potential breakup of the euro zone. Yet investors remain cautious whether the deposit levy in Cuprus, a key term for external funding, would be applied to other euro-zone member countries when some of them seek a bailout in the future.
For the moment, there was little evidence of capital flight out of Spain and Italy. Government bond yields in these two countries, deemed more systemically important for the euro zone than Cyprus, haven't climbed over the past week on the Cyprus crisis.
Yet anxiety rose after Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro-zone finance ministers, told Reuters and the Financial Times Monday that the bailout deal for Cyprus represents a new template for resolving euro-zone banking problems and other countries may have to restructure their banking sectors.
"The market is still concerned about the potential for an impact to some of the other peripheral European countries," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. "If bailout funds are required do depositors on those countries also take a hit?"
"The bailout deal removes a lot of tail risks in the euro zone but uncertainty remains, so I expect volatility in financial markets in the short term," said Jason Evans, co-founder of hedge fund NineAlpha Capital LP in New York.
Even with the bailout, Cyprus will remain at risk of default and a euro-zone exit for a "prolonged period," Moody's Investors Service said Monday.
Moody's senior credit officer Sarah Carlson highlighted the economic consequences of lasting damage to the reputation of Cyprus's financial sector.
"The system's profile as an offshore financial center is unlikely to survive this crisis," Ms. Carlson said. "The potentially irreparable damage to the country's current drivers of economic growth leaves its ability to sustain its current debt highly in doubt."
