IAmNeil

I'd add to Sponge Bob's comments that a Duration hedge only hedges a parallel shift in the yield curve, and as your statement #3 states a 2 bond hedge hedges both the shift and the twist.

Also, the text points out that even though the hedge positions may lose a little money, the yield advantage of the long position in the underlying MBS (over the Treasuries shorted in the hedge) more than compensates for a slight loss on the hedge.