Israel CPI Bonds Increase as Electric Costs to Climb

(Corrects date in seventh paragraph.)

Israel’s consumer price-linked bonds rose to the highest level in more than three weeks amid investor bets inflation will accelerate as electricity prices rise.

The yield on the CPI-linked bond due June 2013 dropped four basis points, or 0.04 percentage point, to 0.56 percent at 11:45 a.m. in Tel Aviv, the lowest since Dec. 15. The two-year break- even rate (ILGGBE02), the rate difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, gained one basis point to 190. That implies an average annual inflation rate of 1.90 percent.

Electricity prices surged 4.7 percent in November, after attacks on a gas pipeline from Egypt interrupted supply, raising input costs for power production. Israel will extend the reduced tax rate on diesel fuel for power production by one year to help keep a planned increase in electricity prices to a minimum, the Finance Ministry said Jan. 5.

“Electricity prices, which are expected to increase by 9 percent in February, will boost inflationary pressure in coming months,” said Gil Chen, a bond trader at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv.

Consumer prices rose 2.6 percent in November from a year earlier, the smallest increase in a year, the Central Bureau of Statistics said Dec. 15. The government’s target range is between 1 percent to 3 percent.

Israel plans to auction 200 million shekels ($52 million) in 30-year bonds tomorrow, the longest maturity in the local market.

The yield on the 5.5 percent notes due January 2022 rose one basis point to 4.52 percent. Two-year interest-rate swaps (ISSW2), an indicator of investor expectations for rates over the period, rose two basis points to 2.46 percent on Jan. 6.

The Tel Aviv Bond 40 Index (TEL-B40), which measures inflation-linked and fixed-rate corporate bonds, fell less than 0.1 percent. The shekel, down 7.5 percent last year, its worst performance since 2001, weakened 0.2 percent to 3.8527 a dollar on Jan. 6.

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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