In the past few weeks--and especially the past few days--we've seen a sharp spike in MBS yields relative to Treasury yields.  And yes, the Treasury yield spike has been plenty sharp in and of itself.  That means MBS are taking a huge beating by comparison.  Why?  Simply put, this is the natural order of things when rates shift gears.  Homeowners with loans that fill the lowest MBS coupons are suddenly at risk of never wanting to refi. 

That makes 1.5 and 2.0 coupons skyrocket in terms of "duration" (think of this like the year count on a Treasury note/bond).  Not only are longer-duration bonds underperforming recently, but the pain is even greater for MBS.  Unlike Treasuries, which will always last for as long as they did when you bought 'em, MBS durations change with the market.  This double whammy for lower coupons speaks to the technical term of "negative convexity," and a "duration ledge."  

With all of the above in mind, it's no surprise to see the harsh punishment of 1.5 and 2.0 coupons relative to 2.5 and especially 3.0 coupons. The following chart shows each coupon's change in price since the beginning of the year.  Simply put: the lower coupons are down roughly 3 points.  2.5 coupons are down less than 2 points, and 3.0 coupons are roughly unchanged.

Longer duration Treasuries have also been underperforming relative to shorter duration Treasuries, but again, the lower MBS coupons have had a worse go of it recently.  We can visualize this by comparing the computed yield of a hypothetical MBS coupon that always has a price of PAR (aka the "current coupon") and a blend of the 5 and 10yr Treasury yields (which is a better match/benchmark for MBS duration than straight 10yr yields).  The higher the green line, the more MBS are underperforming.  Note the bounce at the lower boundary at the beginning of 2021.  These are the levels that I couldn't shut up about when I was warning you that MBS had likely (FINALLY) tightened as much as they were going to tighten vs Treasuries (Note: I give myself zero kudos for that as I initially warned of the bounce potential in Nov/Dec despite MBS continuing to outperform a bit more).

Today's headline will be Fed Chair Powell's congressional testimony.  While the Fed has been cool on the topics of tapering and the spike in long-term rates, congress will nonetheless ask Powell for fresh thoughts on both topics in light of the recent rate spike and the strong economic data.