Correlation Between 2 Year and Five Year

Can any of the company-specific risk be diversified away by investing in both 2 Year and Five 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 2 Year and Five Year into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 2 Year T Note Futures and Five Year Treasury Note, you can compare the effects of market volatilities on 2 Year and Five 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 2 Year with a short position of Five Year. Check out your portfolio center. Please also check ongoing floating volatility patterns of 2 Year and Five Year.

Diversification Opportunities for 2 Year and Five Year

0.98

Correlation Coefficient

2 Year  Five Year

Almost no diversification

The 3 months correlation between ZTUSD and Five is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding 2 Year T Note Futures and Five Year Treasury Note in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Five Year Treasury and 2 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 2 Year T Note Futures are associated (or correlated) with Five Year. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Five Year Treasury has no effect on the direction of 2 Year i.e., 2 Year and Five Year go up and down completely randomly.

Pair Corralation between 2 Year and Five Year

Assuming the 90 days horizon 2 Year T Note Futures is expected to generate 0.57 times more return on investment than Five Year. However, 2 Year T Note Futures is 1.76 times less risky than Five Year. It trades about -0.11 of its potential returns per unit of risk. Five Year Treasury Note is currently generating about -0.09 per unit of risk. If you would invest  10,376  in 2 Year T Note Futures on September 2, 2024 and sell it today you would lose (92.00) from holding 2 Year T Note Futures or give up 0.89% of portfolio value over 90 days.

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

2 Year T Note Futures  vs.  Five Year Treasury Note

2 Year T

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days 2 Year T Note Futures has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Five Year Treasury

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Five Year Treasury Note has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Pair Trading with 2 Year and Five Year

The main advantage of trading using opposite 2 Year and Five Year positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 2 Year position performs unexpectedly, Five 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 Five Year will offset losses from the drop in Five Year's long position.

The idea behind 2 Year T Note Futures and Five Year Treasury Note 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.