Cetes

Cetes (an acronym for Certificados de la Tesorería de la Federación) are the Mexican government's equivalent of US Treasury Bills. Think of them as IOUs from the government of Mexico. They are short-term, zero-coupon debt securities, which is a fancy way of saying they don’t pay regular interest. Instead, you buy them at a discount to their face value (which is always 10 Mexican Pesos) and receive the full face value back when the instrument reaches its maturity date. Your profit is the difference between what you paid and the 10 pesos you get back. Issued by the *Banco de México* (Mexico's central bank), Cetes are considered the safest investment within Mexico and serve as a benchmark for the country's interest rates. They are typically available in terms of 28, 91, 182, and 364 days. For a global investor, Cetes can offer tantalizingly high yields compared to government debt in the US or Europe, but this reward comes with its own unique set of risks.

The magic of a Cete is its simplicity. You are essentially lending money to the Mexican government for a short period, and they pay you back a little extra for your trouble. Let's use a simple example. Imagine a one-year (364-day) Cete is offered with a yield of 11%.

• The face value, or par value, is fixed at 10 pesos.
• You would buy this Cete at a discount for approximately 9.01 pesos.
• You hold it for a year.
• At maturity, the government pays you the full 10 pesos.

Your profit is 0.99 pesos per Cete (10.00 - 9.01). While that might not sound like much, when investing a larger sum, it becomes a significant and, crucially, a highly predictable return in peso terms. The primary auction for Cetes is held weekly by the central bank.

The main attraction for an American or European investor is the potential for higher yields. When government bonds in developed nations are yielding, say, 4-5%, it's not uncommon to see Cetes offering yields of 10% or more. This difference, known as the “yield spread,” is your compensation for taking on the additional risks associated with investing in an emerging market economy. For investors seeking to diversify their fixed-income holdings and capture higher returns, Cetes can be a compelling option.

That higher yield doesn't come for free. For anyone investing with dollars or euros, the risks are very real and must be understood.

• Currency Risk: This is the big one. Your investment is in Mexican Pesos (MXN). The return you ultimately realize depends on the exchange rate risk between the peso and your home currency. If you earn an 11% return in pesos, but the peso weakens by 12% against the dollar during your investment period, you've actually lost 1% in dollar terms. Conversely, if the peso strengthens, it can supercharge your returns. Your Cetes yield and the currency's performance are two separate bets you are making simultaneously.
• Inflation Risk: A high nominal yield can be a mirage if inflation in Mexico is also running hot. The real return (the yield minus the inflation rate) is what truly matters for your purchasing power.
• Sovereign Risk: This is the risk that a government might default on its debt. While Mexico has a solid investment grade rating and is far from being a high-risk country, the risk of default is still considered higher than that of the United States or Germany. It's a low-probability, but high-impact, event.

While Cetes aren't a stock you can buy for 50 cents on the dollar, they can play a strategic role in a value investing portfolio. A core tenet of value investing is patience—waiting for the perfect pitch. Cetes can be an excellent place to “park” cash while you wait for your favorite company to fall into your buying range. Instead of earning next to nothing in a standard bank account, you can earn a respectable yield, preserving your capital and combating inflation while staying liquid. However, investing in foreign government debt requires you to expand your circle of competence. You can't just look at the yield; you must develop a macroeconomic view of Mexico's economy, its political stability, and the likely direction of its currency. A value investor must ask: Is the extra yield offered by Cetes a sufficient margin of safety to compensate for the very real currency risk? Answering that question is key to deciding if this particular instrument has a place in your long-term strategy for asset allocation and achieving your required rate of return.