I’m being tripped up by an aspect of this topic that I’m hoping someone can assist me with. I was always working under the understanding that you can’t effectively hedge an MBS with a single treasury (duration hedge) because of the negative convexity of the MBS, which would result in: as rates rise, the hedged MBS port would experience a LOSS, because the single treasury’s (the instrument you’re hedging with) price would decline in value more than the MBS, creating a loss on the overall hedged position. And vice versa (I thought you’d experience a gain for a decrease in rates using the same logic.)
CFA book 4 page 180 seems to indicate my understanding is off…saying when rates rise, you’ll have a profit on the hedged position.
Anyone have a good understanding of this and can explain how I’m missing this?