This article originally appeared in the July 2010 issue of Asset Securitization Report (www.structuredfinancenews.com)

The defining characteristic of the economic downturn of the last few years has been the collapse in real estate prices from their 2006 peak. The losses have impacted the economy in a variety of ways. Aside from devaluing many families’ single largest asset, declining home prices removed the equity extraction that had been juicing consumption for years. The housing crash has also impacted the labor markets by both destroying many high-paying jobs in the construction trades and impairing the mobility of workers saddled with negative equity.

Treasury yields have pushed sharply lower since early April, as the European currency crisis has combined with fears of a double-dip recession in the U.S.  As shown in Exhibit 1 below, the move in the 10-year Treasury pushed through the lower 2-standard deviation bands on two different occasions, most recently in mid-May.  As I’ll discuss later, the downward push did not appear to trigger large-scale duration buying, which would have pushed the 10-year yield solidly through the 3.25% level.