Mortgage rates were down significantly this past week. In some instances, they were down over 10 basis points. For this, we can thank (blame?) the tiny country of Cyprus.

It seems odd that a tiny Mediterranean-sea country of 1.1 million inhabitants would influence interest rates in a country – the United States – with a population of 313 million. So what's going?

Today's financial institutions are closely intertwined – though lending, borrowing, trading, and market-making relationships. This raises the contagion risk, where something bad in one country can quickly spread. We saw that occur in 2008 when many of the world's largest financial institutions were at risk of collapse.

In Cyprus' case, a banking panic was initiated when the European Union insisted Cyprus implement a 6.75% tax on bank deposits less than 100,000 euros and a 9.9% tax on larger deposits. In exchange, Cyprus banks would receive a ten-billion euro bailout. The fear is that other European countries ( Italy in particular) could be forced to impose the same tax, thus resulting in a mass run on those banks.

In short, fear and uncertainty again sent investors to the haven investments of U.S. Treasury and U.S. mortgage-backed securities; hence the lower mortgage lending rates, which we don't expect to last. Fear passes quickly these days, so we suggest borrowers act quickly.

Courtesy of Jessica Regan.

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