Correlation Between 30 Year and 2 Year

Can any of the company-specific risk be diversified away by investing in both 30 Year and 2 Year at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining 30 Year and 2 Year into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 30 Year Treasury and 2 Year T Note Futures, you can compare the effects of market volatilities on 30 Year and 2 Year and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in 30 Year with a short position of 2 Year. Check out your portfolio center. Please also check ongoing floating volatility patterns of 30 Year and 2 Year.

Diversification Opportunities for 30 Year and 2 Year

0.84

Correlation Coefficient

30 Year  2 Year

Very poor diversification

The 3 months correlation between ZBUSD and ZTUSD is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding 30 Year Treasury and 2 Year T Note Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 2 Year T and 30 Year is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on 30 Year Treasury are associated (or correlated) with 2 Year. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 2 Year T has no effect on the direction of 30 Year i.e., 30 Year and 2 Year go up and down completely randomly.

Pair Corralation between 30 Year and 2 Year

Assuming the 90 days horizon 30 Year Treasury is expected to under-perform the 2 Year. In addition to that, 30 Year is 7.39 times more volatile than 2 Year T Note Futures. It trades about -0.03 of its total potential returns per unit of risk. 2 Year T Note Futures is currently generating about 0.04 per unit of volatility. If you would invest  10,300  in 2 Year T Note Futures on December 1, 2024 and sell it today you would earn a total of  23.00  from holding 2 Year T Note Futures or generate 0.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

30 Year Treasury  vs.  2 Year T Note Futures

30 Year Treasury

Risk-Adjusted Performance

Very Weak

Over the last 90 days 30 Year Treasury has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, 30 Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

2 Year T

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in 2 Year T Note Futures are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, 2 Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with 30 Year and 2 Year

The main advantage of trading using opposite 30 Year and 2 Year positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 30 Year position performs unexpectedly, 2 Year can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in 2 Year will offset losses from the drop in 2 Year's long position.

The idea behind 30 Year Treasury and 2 Year T Note Futures pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.