Bonds rallied sharply today on a combination of factors that are debatable in their direct bond market implications.  In a general sense, European bond market strength spilled over to the US session.  On a specific note, the 2yr Treasury auction definitely served as a catalyst for better buying in the Treasury complex at 11:30am (not a typical auction time).  Either way, Treasuries did quite well while MBS struggled to improve.

The ongoing breakdown in MBS vs Treasuries is getting more and more painful, depending on your definition of pain.  On the one hand, rates are as low as they've been in a long time--either late March, 2019 or early 2018 depending on the lender.  That's actually not painful at all!

On the other hand, mortgage rates haven't dropped nearly as quickly as Treasuries recently.  Pain is much more subjective on this topic.  Ask yourself if you'd care as much if you didn't know that Treasuries were dropping so fast.  If the answer is "probably not," then that pain is pretty manageable.  

But if this is painful because you're receiving tons of questions (or even expectations) tied to the phenomenon (i.e. "why aren't mortgage rates lower if they're supposed to follow the 10yr?!?"), then read on.  Here's a handy bullet-point list of reasons for MBS lagging:

• The most recent prepayment speed report showed unexpectedly quick retirement of MBS coupons that investors figured would last a bit longer.  Faster prepayment = MBS underperformance in most cases
• MBS experienced a sort of coup in late March due to liquidity of Fannie 3.0 coupons.  There was a scarcity, which helped spreads.  Now there's a glut, relatively.
• Chatter about re-privatization of Fannie and Freddie implicitly damages the "government guarantee" (which in turn is thought to be responsible for MBS's ability to maintain a relatively low and stable spread vs Treasuries post-crisis)
• Much of the recent movement in bonds can be traced back to global and/or "risk-off" type motivations.  Such things benefit Treasuries more than MBS anyway.
• Month-end creates constraints for investors regardless of all previous bullet points.  In other words, even if some investors see what's happening to MBS and think they're a better buy at current spreads, they might not be able to do anything about it just yet.

All that having been said, the volatility in spreads over the past 1.5 months is taking place WELL-within the range of spreads seen between late 2018 and March 2019.