While MBS have made up some ground compared to Treasuries over the past few hours, they're generally underperforming this week.  Fannie 3.5s are down 5 ticks today compared to Treasuries being down  3 ticks in price.  The culprit is very likely the monthly prepayment speed report out on Monday.  MBS traders typically make the biggest adjustments to that data in the several days following the report.  So we should start to see the underperformance level-off here.

A separate factor that should help MBS relative to Treasuries is the upcoming 10yr auction today and 30yr auction tomorrow.  Market participants commonly trade yields a bit higher than they otherwise might be heading into auctions.  These pre-auction 'concessions' can help facilitate a smoother auction process.  To use an analogy, if you know you'll soon be required to do some heavy lifting (primary dealers are required to bid on Treasuries at auction), you may take a few deep breaths and avoid any heavy lifting in time leading up to your heavy-lifting task.

In addition to potentially helping MBS close the gap this morning, the auction concession also explains some of the general weakness in bond markets.  The rest of the weakness is a simple factor of yesterday's "risk-off" movement bottoming out mid day.  Since about noon yesterday, bond markets have been in a fairly linear trend sideways to slightly higher.  For all intents and purposes, 10yr yields have simply returned to the important 2.57 technical level and will make their next decision based on the upcoming auction and FOMC Minutes release that follows an hour later.