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I'm looking to use first few principal components of the US treasury yields for trading, and have choice of using either the data for treasuries themselves, or for the corresponding futures contracts. Would the results be similar, or there are reasons to use one particular instrument?

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It is preferable to use constant maturity yields (ideally par yields) for running PCA analyses.

Using constant maturity par yields has several advantages:

  1. By definition, the yields are of constant maturity, so your results won't be distorted by "rolls." When you use either rolling futures yields or on-the-run bond yields, there could be many breaks in the series as the CTD/on-the-run bond changes over time. Rolling futures are particularly bad. The US contract, for example, can trade like a 15-year note or 25-year bond depending on the interest rate environment.

  2. Par yields are immune from coupon effect. If coupon rates gradually increase over time, the associate yield series would be biased downward if the yield curve is upward sloping (high coupon bonds trade at lower yields, all else equal). This makes it difficult to tell whether bonds are really richening, or perhaps we're just seeing a downtrend because of changing bond coupons. Of course, par rates don't suffer from this problem.

As an example, let's say you're interested in looking at how TY (10-year contract) is trading relative to TU (2-year contract) and US (bond contract). You can potentially run a PCA analysis using 1.75y/6.75y/20y par yields (tenors approximate the maturities of current CTDs for the respective futures). The result will be much more robust than if you used rolling TU/TY/US yields.

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This is an interesting exercise and would be compelled to see the results of your data gathering.

The principal purpose of treasury note (cash bond) analysis is for yields and the cross-asset class relative valuation where both provide signals. Alternatively, futures provide a technical analysis picture supplementary to yield dynamics.

Personally I would attempt to combine both, although it depends on your strategies.

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