CETES

What does CETES mean?

The Mexican Federal Treasury Certificates, known as CETES (Certificados de la Tesorería de la Federación in Spanish), are a form of government securities in Mexico. These certificates represent federal treasury certificates and serve as investment instruments issued by the the Ministry of Finance and Public Credit in collaboration with the Bank of Mexico (Banco de México, Banxico), which serves as the country’s Central Bank.

CETES are among the most liquid securities in the Mexican market and have sustained growth in the Mexican financial landscape, playing a vital role in public finances.

The certificates have various maturities, with some having one-year terms. CETES generate steady returns, making them an attractive investment choice for many investors.

CETES are typically auctioned every Tuesday, and the results are published on Thursdays. Their wide acceptance and popularity in the market add to their appeal.

What are the characteristics of CETES?

• The Mexican Federal Treasury Certificates (CETES) represent the oldest debt instrument issued by the Federal Government. These securities are zero-coupon bonds traded at a discount.

• The face value of CETES is 10 Mexican pesos. Currently, they are issued with maturities ranging from 28 to 91 days and also close to six months and one year.

• The primary issuance of CETES occurs through auctions, where participants submit bids for the amount they wish to purchase and the discount rate they are willing to accept.

• CETES are identified by eight-character codes. The first two characters ("BI") identify the security, while the remaining six indicate the instrument’s maturity date (year, month, and day). The maturity date is the relevant number used to identify a specific CETES.

• Notably, two CETES issued on different dates but maturing on the same date will share the same identification code, making them indistinguishable from one another. As an example, a series of CETES issued on August 24, 2000, with a 28-day term maturing on September 21, 2000, would have the same identification code: BI000921.

In Mexico, a well-established secondary market for CETES exists, facilitating outright sales, repurchase (repo) transactions, and securities lending. CETES can also serve as underlying assets in derivative markets, such as futures and options on MEXDER (Mexican Derivatives Exchange) and CME. The CETES series are designed to be fungible.

How are CETES prices calculated?

The price of a CETES can be determined either through its rate of return or its rate of discount, and the final price may slightly differ based on the number of decimal places considered. When calculating the price using the rate of return, the following formula is utilized:

CETES Price = Face Value/(1+(CETES Rate×Days to Maturity/360))

Where:

• CETES Price is the current price of the CETES rounded up to 7 decimal points.

• Face Value is the nominal or face value of the CETES (the value at which it will be redeemed at maturity).

• CETES Rate is the annual interest rate or yield of the CETES.

• Days to Maturity is the number of days remaining until the CETES matures.

It’s important to note that CETES are usually quoted on an annual discount rate basis, and the formula above is used to calculate the price of the CETES in the secondary market. When they are issued in primary auctions, the interest rate is determined by competitive bids from investors.

Why are CETES useful to investors?

CETES, offer several benefits to investors due to their unique characteristics.

1. Low-Risk Investment. CETES are issued by the Mexican government, making them a low-risk investment option. Investors essentially lend money to the government, which is considered a highly reliable borrower. The par value of 10 MXN ensures that the full principal amount is paid back to the investor on the maturity date.

2. Zero Coupon Bonds. Being "zero-coupon bonds" means that CETES do not pay regular interest like traditional bonds. Instead, investors purchase them at a discount to their face value, and the full face value is redeemed at maturity. This allows investors to benefit from the difference between the purchase price and the par value.

3. Flexible Investment Terms. CETES offer flexibility in terms of maturity dates, with a minimum term of 7 days and a maximum of 728 days. This allows investors to choose investment periods that align with their financial goals and liquidity needs. They can be issued for any term, as long as they mature on a Thursday or the day that substitutes this date in the event of a holiday.

4. Regular Auctions. The Bank of Mexico conducts weekly auctions for government securities, including CETES. These auctions determine the exchange rate and purchase price of CETES, providing investors with a transparent and regular market mechanism to buy or sell these securities.

5. Derivatives and Base Rate. CETES can serve as underlying assets in the derivatives market, enabling investors to engage in futures and options contracts based on these securities. Additionally, CETES can act as a benchmark or base rate for other financial products, including loans and interest rates in the market.

6. Diversification. As a government-issued security, CETES offer a way for investors to diversify their investment portfolios. They provide a safe and stable component, especially when combined with other higher-risk or higher-return investments.