Israel Bonds Gain as Palestinian Statehood Bid Concern Eases

Israeli government bonds rose, pushing yields to the lowest in almost a week, as demand for local assets climbed on speculation a planned Palestinian bid for statehood at the United Nations this week will be avoided.

The yield on the benchmark 5 percent Mimshal Shiklit due January 2020 fell two basis points, or 0.02 percentage point, to 4.58 percent at the 4:30 p.m. close in Tel Aviv, matching the level on Sept. 15. The rate on the 5.5 percent bond due in January 2022 dropped three basis points to 4.78 percent. The shekel weakened 0.1 percent to 3.6884 per dollar at 5:25 p.m.

U.S. President Barack Obama and Palestinian President Mahmoud Abbas were set to meet late today, with Obama supporting Israel’s goal of sidetracking the statehood effort. Finance Minister Yuval Steinitz said yesterday a declaration of statehood might lead to Israel suspending the transfer to the Palestinian Authority of $100 million per month in custom fees it collects.

“Israel’s risk premium and the tension that was built in the past weeks are easing on chances the Palestinian bid for state recognition may be averted,” Amir Kahanovich, chief economist at Clal Investment Management Ltd. in Tel Aviv, said by telephone.

Possible Boycotts

Five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, were little changed at 189, the highest level in at least two years, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

A survey of 530 exporters found that about a quarter are concerned about possible boycotts stemming from the Palestinian statehood bid, the Israel Export & International Cooperation Institute said today.

Israeli products, especially those by companies based in or with facilities in the West Bank, have been the target of boycotts. Norway announced in 2009 it would exclude Israel’s Elbit Systems Ltd. (ESLT) from its sovereign-wealth fund, Europe’s largest, because of the defense company’s involvement in the construction of a West Bank security barrier.

The two-year breakeven rate, which reflects market expectations for inflation over the period, rose six basis points to 197, implying an average rate of 1.97 percent. The rate has increased 40 basis points since a Sept. 15 report showed consumer prices rose more-than-forecast in August. The yield on the CPI-linked bond due in June 2013 dropped for a fourth day, falling two basis points to 1.16 percent.

Inflation Expectations

Consumer prices advanced 0.5 percent last month from July as housing costs rose 1.3 percent, the largest monthly increase since at least February, the Jerusalem Central Bureau of Statistics said last week. The median estimate in a Bloomberg survey was 0.3 percent.

“Inflation expectations, which have come down sharply in recent weeks amid slower economic growth and ongoing social protests, are adjusting as higher-than-forecast August prices showed that rising housing costs are still a concern,” said Clal’s Kahanovich.

Prime Minister Benjamin Netanyahu pledged Sept. 4 to help ease the cost of living after more than 400,000 protesters took to the streets. A committee’s recommendations aimed at providing cheaper housing and bringing down prices for food, child care and transportation are due this month.

Two-year interest-rate swaps, an indicator of investor expectations for rates in the next two years, rose two basis points to 2.99 percent. The central bank held the benchmark rate at 3.25 percent for a third month in August amid signs of slowing growth. The bank’s next rate decision is scheduled for Sept. 26.

The Tel-Bond 40 Index of corporate bonds gained 0.6 percent.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net