I made the decision in early-mid August after reading a thread created by Nisiprius where he showed that longer-term bonds behave like a leveraged version of short-term bonds in a balanced portfolio. I posted about it on the 14th and executed it on August 26th when it was time to roll futures.Spec7re wrote:Rob, when did you decide to jump to 26x leverage? You started at 6x. Do you think 26x is safe?
Btw, I'm holding 3 2yr futures with about 80k nominal now, about 9x leverage.
Nisiprius has a strong point that long-term bonds behave like leveraged short-term bonds when looking at a portfolio behavior on an annual basis. On a daily basis, I feel that long-term bonds add an uncorrelated volatility to the portfolio that offsets stocks which is why I still have some long-term bonds in my portfolio.
The nice thing about short-term bonds is that they recover much faster from rate increases than long-term (duration). I mainly need to watch the 2-year yield and take action if it drops below my financing rate.
And to be clear, I changed the asset allocation when I changed leverage. I went from 6x 40 % stocks/30% long-term treasuries/30% intermediate treasuries to 26x 10% stock / 5% long-term treasures / 85% short-term treasuries.
So to answer your question, I believe that 26x is acceptable for my situation and risk tolerance. (Nothing is ever "safe.") I am adding $3k to the portfolio monthly. I plan my portfolio to have a historical worst case of 70-80% loss. The future might be worse than anything in history, so I might lose 100% or 120%. As the portfolio grows relative to my monthly deposits, I will reduce my leverage.
One last thing that I will say is that with a higher leverage ratio, I expect more alpha from volatility harvesting. Even though both 6x and 26x portfolios have similar CAPM risk/return expectations, I believe that the 26x portfolio will see slightly better returns.