When financial markets are this volatile, finding safe and easy ways to earn steady passive income is crucial — not only for retirees but also for those who are still working. Limiting investment risk is key to ensuring that funds needed for your basic living expenses in Mexico aren’t jeopardized.
With these concerns in mind, I’ll examine two very safe investment options for earning passive income — Pagarés and CETES.
NOTE: This post isn’t intended to provide a comprehensive review of every Pagares investment available in Mexico. Moreover, yields quoted here are subject to change, so the recommendations shared may not reflect current conditions. Always do your own due diligence before investing money.
What Are Pagarés?
In Spanish, the word “pagaré” literally translates to “I will pay.” In the financial world, Pagarés are promissory notes you buy from a private bank.
Functionally similar to Certificates of Deposit from a U.S. bank, Pagarés involve investing cash for a fixed period with a guaranteed yield, payable when the Pagarés mature.
Pagarés are available for a wide variety of terms, most typically for 30, 90, 180, and 365 days. As a rule, you get higher interest rates the longer you commit your money to the bank.
Fortunately, you don’t have to be rich to buy them. While practices vary, a handful of private banks offer Pagarés for $2,000 pesos ($100 USD), or less.
Another good thing about Pagarés is that they’re insured by IPAB (federal deposit insurance in Mexico) up to $3.1 million pesos, or about $160,000 USD at current exchange rates.
The downside to investing in Pagarés is their lack of liquidity, i.e., you cannot take your money back before the note matures without incurring penalties that decimate your rate of return. So, before you commit any funds, confirm that you won’t need the money while it’s invested.
Pagarés can be purchased in person at most traditional banks, as well as via mobile apps with more digitally savvy financial institutions like Banamex, BBVA, and Covalto.
Cheat Sheet: Pros & Cons of Investing in Pagarés:
Pros: Very low risk (up to the IPAB insured amount), guaranteed rate of interest, easy and convenient to purchase from traditional banks.
Cons: Lack of liquidity, penalties for early withdrawals, high minimum investments required in some cases, risk to principal above the IPAB insurance ceiling, and most importantly — interest rates are often less competitive than with CETES.
My advice: If you decide to buy Pagarés, shop around for competitive rates while focusing on the most established banks to reduce investment risk.
What Are CETES?
CETES are Mexican government bonds, so when you buy them, you’re lending money to the Mexican government.
The CETES acronym stands for Certificados de la Tesorería de la Federación in Spanish. For U.S. expats, think of them as Mexico’s equivalent of U.S. Treasury bills.
Sometimes referred to as “zero-coupon” bonds, these securities are sold at a discount, with investors receiving the full face value of the bond at maturity. For this reason, you receive no interest payments on CETES until the bond matures, so holding them for the full term is essential to making money.
Why consider CETES?
Right now, CETES yields are 8.3%-8.55% for investment periods ranging from 1 month to 1 year. This tool is an easy way to check current CETES yields for any investment period.
By design, CETES are a very accessible, “everyman” type of investment. You can start investing in them with as little as $100 pesos (~ $5 USD) on hand.
While it’s sometimes possible to buy CETES from a private bank, going that route likely involves paying a commission. So most investors choose to buy them directly from the government website CETES Directo.
Compared to Pagarés, liquidity for CETES is much better. Investors can sell them in the secondary market before they mature. If you do this, you won’t incur a penalty like you would with Pagarés, but you do give up the yield.
How much risk is there with CETES? Unlike Pagarés, CETES aren’t covered by IPAB insurance, but even so, they’re still considered the safest type of investment in Mexico because they’re fully secured by the federal government, which has never defaulted on CETES interest payments in the 47 years they’ve been offered.
Seasoned investors know there’s a first time for everything, so if you’re still concerned about default risk, opt for shorter investment periods.
If you’d like to go deeper on CETES before investing, check out my previous in-depth article on the topic.
Cheat Sheet: Pros & Cons of Investing in CETES:
Pros: Low risk for a highly competitive and guaranteed rate of interest. Low minimum investment required. Liquidity — bonds that can be sold before they mature. Easy to purchase online if you are relatively skilled at online banking. Better yields than with Pagarés for short holding periods and small investments.
Cons: The monthly investment ceiling is quite low. No IPAB insurance.
My advice: Buy them now to lock in these excellent yields. Because many experts believe Mexico’s central bank will cut its benchmark interest rate later this month, CETES yields may soon drop.
What are the Yields on Pagarés & CETES Right Now?
In the table above, investors in all but one of the Pagarés receive IPAB insurance up to $3.1 million pesos. The exception is Klar, a Mexican fintech company that’s not technically a bank, so the level of deposit insurance is much lower, up to $195,700 pesos.
While Klar may at some point receive a full banking license, they operate in a different category for now. For those chasing the best Pagarés yields, you do take on extra risk at Klar. For my money, Covalto and Hey Banco (the digital subsidiary of Banregio bank) offer a better value proposition as they’re both IPAB-insured.
At the other end of the spectrum is BBVA, which distinguishes itself with its uncompetitive Pagarés yields. For shorter holding periods, their rates don’t even keep up with inflation (currently about 4%). I suspect they’re disproportionately sold to the bank’s least savvy customers, too lazy to research the alternatives.
Final Thoughts
For my time and money, CETES are the way to go because setting up an account takes about 20 minutes, you can buy them online 24/7, and then transfer the proceeds back to your bank account once the note matures.
Forget about heading to a local bank in person, which is more likely if you invest in Pagarés and don’t already have a deposit account at the bank where you want to invest. As seasoned Mexpats know, this is often a painful experience due to crowds and less-than-stellar customer service.
While Pagarés and CETES won’t make you rich, they can be a nice addition to a diversified investment portfolio, providing safe and steady income in these unpredictable times.
USEFUL LINKS
Actinver website and current rates on Pagarés.
Banamex website and product page on Pagarés.
BBVA website. There are no details on Pagarés rates outside of the mobile app.
Covalto website and rates on Pagarés.
Hey, Banco website and rates on Pagarés.
Inbursa website and rates on Pagarés.
Klar website and current rates on Pagarés.
Sources: PractiFinanzas, Miranda Intelligence, CETES Directo