Israel CPI Bonds Drop to One-Week Low on Economy, Housing Costs

Israel’s consumer price-linked bonds fell to the lowest level in more than a week amid investor bets slowing economic growth and declining housing costs will push inflation lower.

The yield on the consumer price-linked notes due June 2013 rose one basis point, or 0.01 percentage point, to 0.26 percent at 3:59 p.m. in Tel Aviv, the highest since Feb. 6. The one-year break-even rate, the difference between inflation- linked bonds and fixed-rate government bonds of similar maturity, retreated for the first time this month, declining two basis points to 225. That implies an average annual inflation rate of 2.25 percent.

Consumer prices fell 0.2 percent last month after being unchanged in December, according to the median estimate of 10 economists in a Bloomberg survey. Inflation probably eased to an annual 1.9 percent from 2.2 percent, according to a survey of 12 economists. The statistics bureau will release the data tomorrow. Home prices fell about 1 percent in the fourth quarter from the previous one, the Justice Ministry said today.

“The downtrend in domestic activity and private consumption continues, while exports are weakening,” said Rafael Gozlan, chief economist at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “Furthermore a slowdown in the pace of the increase in rental prices in coming months is expected to lead to a decrease in the inflation environment.”

Growth Slows

The yield on the 5.5 percent notes due January 2022 increased two basis points to 4.62 percent, the highest since Dec. 15. The economy may expand “a little less” than 3 percent in 2012 as exports decline, the IMF said yesterday, down from its 3.6 percent September forecast. Israel posted its widest trade deficit since at least 1995 in January as the European debt crisis weakened global growth and exports fell, the statistics bureau said Feb. 12.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose one basis point to 2.46 percent. The Bank of Israel, which lowered borrowing costs 25 basis points to 2.5 percent on Jan. 23, is willing to make further rate cuts if economic growth slows, Governor Stanley Fischer said Jan. 26. About 40 percent of the nation’s economy is based on exports, with Europe and the U.S. being the largest markets.

The shekel weakened for a third day, declining 0.3 percent to 3.7361 a dollar. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 263.14.

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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