This is how it works:
Why does an island with a population of 1.1 million people matter to investors and to mortgage rates? Cyprus' economy isn't that important to investors, but the proposed tax on deposits concerns investors because of the fear that other European countries could consider a similar solution to their debt issues.
Fear and uncertainty about the global economy normally result in investors selling riskier assets to park their money in safer assets, such as U.S. Treasury bonds and mortgage-backed securities, Moulton explains. As the demand for these safer investments increases, the yields, or rate of return on them, tend to decline. Mortgage rates often follow the same direction of yields. Mortgage Rates Wilt In The Shadow Of Cyprus | Bankrate.com.