These days, the US economy seems to rise and fall on the wings of the housing sector.  Unfortunately, this sector is in a tailspin as higher interest rates have left many homeowners unable to pay their mortgages, causing a crisis in the oft-cited subprime market.  Already, several hedge funds have nearly collapsed due to subprime mortgage uncertainty, and nearly 600 portfolios of subprime mortgages (representing $12 Billion) have been downgraded as a result of declining creditworthiness.  Investors fear that instability in the subprime market could spread to the rest of the US economy and/or drive the Federal Reserve Bank to lower interest rates, which would narrow the interest rate differential between the US and most of the west. Reuters reports:

Lower U.S. bond yields arising from problems in the subprime sector have diminished the allure of U.S. Treasury debt. The yield on the benchmark 10-year U.S. Treasury note…is at 5.08 percent, down from about 5.29 about a month ago.

Read More: Dollar hits record low vs euro on subprime woes