In the day just passed, bonds rallied to start the overnight session, largely following Brexit-related trading in Europe.  Yields rose moderately heading into the domestic session, but were quickly slammed down to multi-year lows by the incredibly weak ISM Manufacturing numbers.  After that, there was another gradual give-back heading into the close with at least some of the weakness attributed to corporate supply pressure.  MBS weaker/wider vs Treasuries at first but then tightened significantly in the afternoon (they held steady while Treasuries weakened). 

In the day ahead, MBS will again attempt to capitalize on the broader sideways range and modest weakness in Treasuries.  At this point, most of the MBS weakness in the 2nd half of August has been erased.  That still leaves a bigger batch of weakness intact from the first half of August, but we have to start somewhere.  If anything, the MBS recovery has happened sooner and in more of a stable way than most analysts expected.  The past 4 days in particular have seen MBS able to hold very steady while traders sold Treasuries.

Here's a look at the broader relationship between 10yr yields and computed MBS yields in a single line (higher = weaker MBS,  lower = stronger):

And finally, here's the sideways range in Treasuries that's making it all possible (this is exactly what we said we'd need to see in order for MBS to catch their breath, so it's no surprise to see most of the spread tightening coincide with this range).

There are no significant economic reports on tap today.  US bond markets face a bit more corporate supply, with one potentially big offering from Apple.  Treasuries are starting the day slightly weaker after European bonds sold-off more aggressively overnight.  MBS are hanging tough very close to unchanged levels.