Equity benchmarks for Italy and Spain underperformed their European counterparts Monday following news of the proposed Cyprus bank bailout, but credit markets in both countries have seen a muted reaction. The charts below show the spreads on ten year sovereign debt of Italy and Spain relative to Germany. While spreads widened by close to 10 bps in each country, the moves look tame relative to the range over the last several months. In fact, in both countries spreads are still below the levels they reached in the immediate aftermath of the Italian elections.
We could certainly see further skittishness on the part of investors when the Cyprus banks finally do open back up for business, but for now investors have shrugged off Cyprus.(click to enlarge)