"Why Can't I Create a New Record in a Subgrid with an N:N Relationship in My Model-Driven App?"
I'm having the same issue. It does seem like the N:N relationship is the reason this fails.
Add &ribbondebug=true to your URL and you can see that it responds a 'false' value for that button and refers to the relationship being thie issue.
However I don't understand why this is an issue... you can still create a new related record once you click on 'add existing':