Yesterday was one of the most boring trading sessions in recent memory.  There were no meaningful market movers to discuss for the Treasury complex.  And the only potential market movers proved to be almost meaningless.  These included a tariff headline that simply referenced the implementation of a tariff change that was already announced and understood as well as the 5yr Treasury auction.  As far as the bond market was concerned, bot of those events were forgettable (i.e. whatever movement they created was quickly erased).  

MBS couldn't have been happier with that situation.  A narrow trading range and an absence of gains in Treasuries is just what the doctor ordered.  The spread between MBS and Treasuries began to narrow in a noticeable way--arguably the most noticeable since the big spread blowout began.  Here's what it looks like on a chart of MBS prices versus 10yr yields.  Note: the conventional definition of MBS spreads vs Treasuries calls for the use of computed MBS yields (which are based on a subjective calculation due to consumer behavior--which affects yields--not being perfectly predictable).  Instead, I like to use something that involves no guesswork and something that we're all more familiar with: plain old MBS prices.  In order to get them moving in the same general direction as Treasury yields, the y-axis is inverted such that higher prices are lower on the chart.

This is GREAT NEWS, right?  I mean just look at that blue line surge back down toward the yellow line!  MBS have almost closed the gap!

Now for the "fun" part.  You should always be wary about chart scaling manipulation when looking at charts that someone else has placed in front of you.  They could have an agenda, and chart scaling is the single easiest way to shift the message in their favor.  Let's pretend I wanted you to believe MBS were indeed closing the gap as I semi-sarcastically said above.  That chart would be fairly convincing, at least until you saw the next one.  The only changes I've made are too the overall time period (i.e. it goes back farther into the past) and to the y-axis scaling.

YIKES!  In this light, although we can see the 2 lines move a tiny bit closer together over the past 2 days, the broader gap is far from closed.  The good news is that there's really not any more bad news to be delivered by additional re-scaling.  In other words, if we took this chart back 7 years and lined the lines up with the most possible overlap, this is is roughly how the y-axis scaling would be.

So are MBS closing the gap or not?!  

It doesn't work like that, sorry...  All we know is that they've closed the gap a bit over the past 2 days.  It's not even the first time this has happened in August.  It's just more noticeable now because we're more desperate to see it.  Here's a line that plots the spread between the two.  

Long story short, every little correction (like those seen above) has the chance to be a long-term bounce in its infancy.  Could we be looking at the highest/widest spreads of the past 7 years?  Sure.  But additional volatility and additional gains in Treasuries could also keep pushing the MBS underperformance.  All we know is that it will take TIME, and that bond market stability (or even modest Treasury weakness) will help accelerate the healing.