I've been tasked with researching trading strategies relating PCA to trading fixed income futures instruments. Apparently PCA is frequently used in this area. I'm just looking for some references for obtaining a basic idea of what a strategy might look like. I'm not looking for a winning strategy -- just an outline of how PCA might be useful in generating trading signals. I understand the mathematics behind PCA and have used it in other areas, but its applications to finance are new to me.
One of the best pieces ever written on this topic is Salomon's "Principles of Principal Components," which is readily available on the Internet. I won't go into the details, since this paper is ridiculously comprehensive, but the fundamental idea is straightforward -- if you run a PCA based on yields, the first three components capture most of the variances, with the three factors roughly interpreted as the level, slope, and curvature of the curve.
The most widely used application for PCA is butterfly trading (e.g., you may buy the TY contract against FV and WN; or you may buy EDZ6 against EDZ5 and EDZ4). PCA allows you t compute the "risk weights" needed so that the structures are neutral to the first two principal components. This allows you to focus on trading the curvature of the yield curve, without taking on level/slope risks.