Correlation Between Five Year and 2 Year

Can any of the company-specific risk be diversified away by investing in both Five 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 Five 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 Five Year Treasury Note and 2 Year T Note Futures, you can compare the effects of market volatilities on Five 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 Five Year with a short position of 2 Year. Check out your portfolio center. Please also check ongoing floating volatility patterns of Five Year and 2 Year.

Diversification Opportunities for Five Year and 2 Year

0.97

Correlation Coefficient

Five Year  2 Year

Almost no diversification

The 3 months correlation between Five and ZTUSD is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Five Year Treasury Note 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 Five 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 Five Year Treasury Note 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 Five Year i.e., Five Year and 2 Year go up and down completely randomly.

Pair Corralation between Five Year and 2 Year

Assuming the 90 days horizon Five Year Treasury Note is expected to generate 2.31 times more return on investment than 2 Year. However, Five Year is 2.31 times more volatile than 2 Year T Note Futures. It trades about 0.09 of its potential returns per unit of risk. 2 Year T Note Futures is currently generating about 0.1 per unit of risk. If you would invest  10,640  in Five Year Treasury Note on December 28, 2024 and sell it today you would earn a total of  130.00  from holding Five Year Treasury Note or generate 1.22% return on investment over 90 days.

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

Five Year Treasury Note  vs.  2 Year T Note Futures

Five Year Treasury

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Five Year Treasury Note are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Five 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

OK

Compared to the overall equity markets, risk-adjusted returns on investments in 2 Year T Note Futures are ranked lower than 7 (%) 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 current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Five Year and 2 Year

The main advantage of trading using opposite Five Year and 2 Year positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Five 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 Five Year Treasury Note 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..