Correlations for 10-Year Note futures (ZN/TY) and TBA futures (by coupon)
Please refer to the table below of the correlations of daily returns of 10-Year Treasury Note futures and 30-Year UMBS TBA based on the rolling front month contract month in 2023.
Table 1: One-year history (2023) – Correlation of daily returns for 10-Year Note futures (TY) and TBA futures coupon stack for rolling front month
| Ty and TBA Correlation | |
|---|---|
| Coupon | Front Month Correlation |
| 20U | 0.8263 |
| 25U | 0.8795 |
| 30U | 0.8817 |
| 35U | 0.8782 |
| 40U | 0.8903 |
| 45U | 0.8870 |
| 50U | 0.8787 |
| 55U | 0.8618 |
| 60U | 0.8303 |
| 65U | 0.3428 |
The 10-Year (TY) correlations ranged from 0.343 to 0.890. The 4.0% coupon produced the highest correlation. The 6.5% coupon produced the lowest correlation.
Example: Spreading 30-Year UMBS 5.5% coupon TBA and 10-Year Note (55U/ZN) futures
In 2023, the 55U/ZN spread demonstrated a high correlation of 0.8618. The current duration weighted ICS ratio is 3:2. The TBA 5.5% coupon results in a position of 3 contracts per spread (long/short). The 10-Year Note futures (ZN) results in an opposite (short/long) position of 2 contracts per spread.
In 2023, we reviewed days with strong correlation and weak correlation between these two markets. Suppose you were short the spread. Therefore, you would have been short 3 of the 55U and long two of the ZN. On the three-day period of strong correlation (9/27/23 – 9/29/23), you would have incurred a minor loss of $253 by being short the spread. On the day of weak correlation (3/22/23-3/23/23), during the banking crisis, you would have incurred a profit of $3921 by being short the spread.
Please refer to the table below for the profit and loss of the two periods described above.
Table 2: Profit and loss of 5.5%/10-Year Note ICS during strong and weak correlation in 2023
|
Date |
Spread External Name |
Leg 1-TBA Px |
Leg 1 Position |
Leg 2-ZN Px |
Leg 2 Position |
Spread Px |
Spread P&L |
|---|---|---|---|---|---|---|---|
|
3/22/23 |
UVN 03-02 |
101.016 |
Short/Sold 3 |
113.719 |
Long/Bought 2 |
75.61 |
|
|
3/23/23 |
|
101.219 |
|
115.984 |
|
71.689 |
3.921 |
|
9/27/23 |
|
96.312 |
|
107.578 |
|
73.78 |
|
|
9/28/23 |
|
96.547 |
|
107.859 |
|
73.923 |
|
|
9/29/23 |
|
96.719 |
|
108.062 |
|
74.033 |
-0.253 |
Correlations for 5-Year Note futures (ZF/FV) and TBA futures (by coupon)
Please refer to the table below the correlations of daily returns of 5-Year Treasury Note futures and 30-Year UMBS TBA based on the rolling front month contract month in 2023.
Table 3: One year history (2023) – Correlation of daily returns for 5-Year Note futures (FV) and TBA futures coupon stack for rolling front month
| Ty and TBA Correlation | |
|---|---|
| Coupon | Front Month Correlation |
| 20U | 0.7909 |
| 25U | 0.8388 |
| 30U | 0.8496 |
| 35U | 0.8503 |
| 40U | 0.8614 |
| 45U | 0.8607 |
| 50U | 0.8508 |
| 55U | 0.8291 |
| 60U | 0.7933 |
| 65U | 0.3056 |
The FV correlations ranged from 0.306 to 0.861. The 4.0% coupon produced the highest correlation. The 6.5% coupon produced the lowest correlation.
Please refer to the chart below for the summary chart for the rolling nearby contract month for both TBA and Treasury futures.
Chart 1. Correlation of monthly returns for 5-Year and 10-Note Treasury futures and coupon stack of TBA futures for the nearby contract month
