Israeli Inflation-Linked Bonds Gain on Consumer Price, Rate Bets

Israel inflation-linked bonds headed for the biggest monthly gain in more than a year on investor speculation consumer prices will rise and after the Bank of Israel lowered borrowing costs.

The yield on the consumer price-linked bond due June 2013 dropped two basis points, or 0.02 percentage point, to 0.63 percent at 2:29 p.m. in Tel Aviv. The rate has tumbled 33 basis points this month, the most since October 2010. The two-year breakeven rate, the yield difference between inflation-linked bond and fixed-rate government bonds of similar maturity, rose three basis points to 205, implying an average annual inflation rate of 2.05 percent.

The central bank cut interest rates for the second time in three months to 2.75 percent on Nov. 28 to cushion the economy from the impact of a European crisis. Natural-gas flow from Egypt to Israel halted after an explosion on the Sinai pipeline network that delivers the fuel. The price of electricity in Israel may increase by 20 percent to 30 percent in 2012, DS Securities & Investments Ltd. Alex Zabezhinsky said.

“Inflation expectations are rising on bets the central bank will continue to lower interest rates in coming months which is expected to weaken the shekel and make imports more expensive,” Tel Aviv-based Zabezhinsky said by phone. “The gas explosion this week adds to expectations that prices will rise as it is becoming clearer that Israel can’t count on supply from Egypt and will have to switch to costlier alternatives.”

The shekel, headed for its worst year since 2002, declined less than 0.1 percent to 3.7907 a dollar. The currency has lost 4.5 percent this month and 7.1 percent in 2011.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped two basis points 2.63 percent. Two out of 13 economists surveyed by Bloomberg forecast that the Bank of Israel will lower interest rates to 2.5 percent at its next meeting on Dec. 26. The remainder expect the central bank to keep rates on hold.

The yield on the 5.5 percent bonds due January 2022 rose one basis point, or 0.01 percentage point, to 4.74 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

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