KUDOS - I had the following setting in the registry:
/usr/bin/inetd.exe REG_SZ binmode tty ntsec
I don't know that that's the culprit - I just set CYGWIN=tty and TERM=cygwin, and started a fresh bash from a cmd shell, and vim worked fine with your example.
(Of course, it did show that other problem discussed around here, in that after I exited vim, bash was left in a no-echo mode..)
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