We are adding a new macro position to our portfolio: long 5 year CDS on Mexico currently trading at 67 bps. The increase in growth expectations and stabilization of geopolitical concerns have made Mexico an attractive country for both equity and local debt investments. As a result, foreign ownership of debt in Mexico has increased from 7% in 2007 to 37% in 2014. The high relative yields, improved credit quality and currency appreciation made local debt extremely attractive to foreign investors, but the end of QE in the US and the realization of rising rates create heightened risks. The position also benefits from tail hedge properties due to is -2.1 beta to the S&P 500 and -0.74 correlation.
We are adding long 5 year CDS position with the expected negative carry of 1% of our NAV and our expected gains during an event equivalent to 2011 are 3.5%.