Mexican CETES meet the tests required for good collateral. CETES can be bought and sold freely in large amounts, and are issued and redeemed every 91 days, meaning they meet the liquidity test. Given their short-term nature, 91 days, they are moderate to low duration, which makes them less exposed to violent moves in interest rates. Short maturity creates stability in price. In sharp interest rate moves, longer bonds normally move more than the short end. CETES, whether tokenized or in nominal form, are held in bona-fide custodial providers. Providers that are transparent and where the value is constantly known.
CETES are backed by Mexican sovereign debt, which means the government has the powers of taxation and money supply management to help ensure the CETES are repaid. Second, Basel III, a risk asset weighting protocol, allows national authorities to assign 0% risk weight to sovereign debt issued by their own government, provided exposures are denominated and funded in local currency. Basel III does not deem Mexican government issued CETES a huge risk, which enhances their status of stability.
CETES are widely available to investors all over the world, but often setting up the account in Mexico can be costly and take time. One solution is tokenization, a vehicle that can be bought and sold easily on multiple platforms, which opens the world to CETES for yield and collateral purposes.
By looking at the present financial condition of a country, a judgement on currency risk can be made. Three key data points for a country's financial position are 1) Current Account Deficit as a percentage of GDP 2) the balance of trade (nominal number), government debt as a percentage of GDP. Mexico's Current Account/GDP is .8% of GDP and trending positively. Although a negative number expresses more money flowing out than in, in Mexico it is still low and trending in the right direction, not a major risk. The Trade Balance in Mexico recently turned negative due to the shock of US tariffs. But the negative balance is minimal, and it was in surplus all year until the tariff impact. Government debt to GDP measures how much a country has borrowed as a percentage of the total value of what they produce. Mexico's government debt as a percentage of GDP is moderate at 47% and trending down.
Inflation is important to watch when looking at sovereign debt stability. Unexpectedly high inflation leads to higher interest rates and possible currency weakness. Regarding inflation, Mexico is in a good place; Inflation peaked in May at 4.42% and at last reading (October 25) was at 3.57%.
Given the power of the Mexican government to ensure repayment through multiple means, like taxation or printing money, investors can have a high degree of confidence to be paid back. At the same time, the economic condition of Mexico from a financial position and inflation seems to pose little risk. Finally, CETES can be traded all over the world, with the biggest exposure coming from tokenization, meaning there will be decent liquidity.
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