I know a two-bond hedge involves using 2-year and 10-year treasury bonds, but how does it work?
Using two hedging instruments from two maturity sectors in the yield curve to hedge a MBS provides the benefit of adapting to twists in the yield curve Use a 2-year Treasury and 10-year Treasury with same duration as the mortgage security; the 2-year will adjust to changes in short-term rates while the 10-year adjusts to changes at the long end of the curve