Nov. 30 (Bloomberg) -- Israeli nine-year government bonds had their biggest monthly gain since issuance, in a period when global financial turmoil has prompted the Bank of Israel to cut the lending rate to a record low.

Yields on two-year notes touched record lows as Bank of Israel Governor Stanley Fischer has lowered the benchmark rate by 1.75 points since Oct. 7 to 2.5 percent as central bank forecasts show inflation slowing to 1.6 percent next year.

Yields on nine-year notes fell to near a nine-month low on speculation inflation will wane as the global economic slowdown shrinks demand for Israeli exports. The central bank forecasts inflation slowing to 1.6 percent next year. Israel’s expansion will slow to 2 percent in 2009, the Organization for Economic Co- operation and Development said on Nov. 25.

“Demand has been very high for government bonds as expectations are that inflation will be very low and interest rates will continue to fall,” said Gil Chen, a trader at Israel Brokerage & Investments Ltd. “The Finance Ministry and the U.S. rescue plans have also gone a long way in restoring demand for government bonds.”

Yield on the nine-year Mimshal Shiklit sank 67 basis points to 5.66 percent in November. The 5.5 percent security, due February 2017, advanced 4.59 shekels to 103.07. Bond yields move inversely to prices. Yield on the two-year Shahar notes plunged 95 basis points to 2.87 percent in November. The 6 percent government note, due January 2010, climbed 1.42 shekels to 108.55 shekels.

Inflation Outlook

The Bank of Israel on Nov. 20 reduced its forecast for growth next year to 1.5 percent from 2.7 percent. The central bank lowered its benchmark lending rate on Nov. 24 by half a percentage point to stimulate the slowing economy.

The global slowdown prompted economists in a central bank survey on Nov. 16 to lower their inflation forecast to 1.6 percent in the coming year. Israeli growth will slow to 2.2 percent in 2009, Leader Capital Markets Ltd. said in an e-mailed report on Nov. 16.

“Global financial turmoil is deepening the slowdown, with the pace of economic activity not expected to pick up substantially before the latter part of 2009,” the OECD said in its report this month in which it reduced its growth expectations for Israel.

Two-year inflation-linked Galil notes yielded 191 basis points more than the equivalent shekel-denominated Shahar notes as traders’ expectations for consumer-price growth waned. At the start of November, the Shahar notes yielded 31 percentage points more than the Galil securities.

Weaker Shekel

The shekel weakened by 4.1 percent against the dollar in November, breaching the level of 4 per dollar for the first time this year, as interest rates fell. The shekel last traded at 3.9335 per dollar after the Finance Ministry announced on Nov. 26 an 11 billion-shekel program to boost credit and liquidity in the financial system.

The plan will guarantee 6 billion shekels in bank lending and provide an additional 5 billion shekels to purchase corporate debt, the Finance Ministry said. It will also cut taxes to attract more foreign investment.

The Mimshal Shiklit and the Shahar government bonds account for about 60 percent of domestic debt traded on the Tel Aviv Stock Exchange and Galil inflation-protected notes make up about 40 percent, according to Finance Ministry figures.

To contact the reporter on this story: David Wainer in Jerusalem at dwainer@bloomberg.net

Last Updated: November 30, 2008 11:42 EST