What Will It Take to Break the Concrete Ceiling for MBS?

Treasuries are clearly trending lower and MBS clearly are not.  Even since hitting the low 2's after the initial rapid moves lower in yield during early August, Treasuries have CONTINUED to trend down in yield, and with each passing day, that fact becomes clearer and clearer.  The other fact is more painful, and that is that MBS have continued to confirm they're dealing with concrete ceilings overhead, not absolutely unbreakable but certainly frustrating in the short term.  What will it take to break them?

First of all, let's take a visual look at what we're talking about, below is an intermediate term chart of 10yr yields, the recent trend is evident.  (we also threw in the technical 2.06 mentioned yesterday for continuity and comparison)

But that trend is perhaps a bit short for a confirmed downtrend.  So if we take a look at other trendlines suggested by past action as well as internal trendlines in the most recent downtrend, we find that that all lie along the same slope...  10's have essentially been trending lower in yield all year

How have MBS navigated the same waters?  Before we get to the chart, a few things should be mentioned.  First of all, we wouldn't expected MBS to be able to keep pace with Treasury benchmarks into the steepest rally in history.  Time and again we've referenced that Treasuries will be the primary beneficiary of a "risk-off" trading environment and only with TIME and DECREASED VOLATILITY could MBS be expected to close the gap.  But they're not....

Ok ok ok... so that's 4.0's.  Maybe we could argue that as yields get lower, 4.0's begin to lose favor to 3.5's (negative convexity - falling interest rates make 4.0's more likely to be paid off early vs 3.5's, thus keeping a lid on rising prices).  So is it only 4.0's that are hitting this ceiling as negative convexity pushes the active market down into 3.5's?  Not even close:

Ok, so negative convexity is apparently not the culprit here.  And 4.0's "losing favor to 3.5's" isn't an issue in terms of there being more of a market for 3.5's because there IS NO MARKET for 3.5's!!!  At least not as far as new TBA-MBS originations are concerned. But the hope is that this might change, and with it, the concrete ceilings could have their only legitimate chance of crumbling.  We should know more about this next week after the current crop of MBS have settled and we're rolled over to the next month's coupons.  But for now, the current rally has been too far, too fast for MBS to be able to keep up.  If they did, it would/could create more problems for the industry than the mere frustration of feeling like "rates aren't low enough."