It's a real bloodbath out there in the secondary mortgage market right now. The spread between MBS yields and Treasuries has quickly gone from surprisingly decent the worst it's been in more than 7 years. The last time MBS were performing this poorly against Treasuries, the Fed was compelled to step in with the mortgage-specific QE3 announcement.
So is this the end of the world?
No... but it will feel like that for a bit longer. Today was just the most recent installment--and a fairly odd one at that. Why was it odd? Because the broader bond market wasn't very volatile during the time MBS were trading. Typically, we need to see some big move to lower yields, a lot of intraday volatility, or a reversal of some previous trend. None of the above were present today. MBS simply "gave up" in the afternoon.
The discrepancies weren't huge. Fannie 3.0 coupons were down 5 ticks (.16) whereas 10yr notes were down 2 ticks (0.06). It's just odd to be giving up ground on a day where Treasuries lost ground. Best case scenario, this is a combination of month-end position shuffling and the late August illiquidity that tends to be more pronounced in the mortgage market than in Treasuries. If that's the case, the 2nd week of September could see some of these wounds begin to heal.