Israel Bond Yields Rise to 2-Month High as Rates Seen on Hold

Israel’s benchmark bonds fell, pushing yields to the highest level in more than two months, on bets Greece’s deal to secure a second bailout may lead the central bank to hold borrowing costs next week.

The yield on the 5.5 percent notes due January 2022 rose three basis points, or 0.03 percentage point, to 4.64 percent, the highest since Dec. 15 at 12:31 p.m. in Tel Aviv. One-year interest-rate (ISSW1) swaps, an indicator of investor expectations for the benchmark rate in the next 12 months, jumped five basis points to 2.51 percent, matching the level on Dec. 12.

Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default. Exports make up about 40 percent of the Israeli economy and Europe is one of the largest markets. The Bank of Israel will hold the benchmark interest rate at 2.5 percent at a policy meeting Feb. 27, according to all 20 analysts in a Bloomberg survey.

“The central bank is likely to save its ammunition next week so it can respond to future economic developments,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said by phone. “Despite a moderation in economic activity, the fact that the liquidity problem in Europe has eased and the possible renewed inflationary pressure give support for interest rates to hold at the current level.”

Interest Rates

Consumer prices climbed an annual 2 percent in January compared with a median estimate of 1.9 percent. Inflation is expected to be 2.4 percent in the next 12 months, according to a survey of economists released by the Bank of Israel on Feb. 19. Inflation erodes the value of fixed-income payments.

Bank of Israel Governor Stanley Fischer said Feb. 2 the country has “plenty of room” to lower interest rates if needed. It cut the benchmark rate by a quarter-point last month to 2.5 percent, the third reduction in five months. Borrowing costs may fall as much as 25 basis points in coming months, Shafrir said.

The one-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government notes of similar maturity, rose one basis point to 257, implying an average annual inflation rate of 2.57 percent. The rate has increased 28 basis points since consumer price moves were announced on Feb. 15.

The central bank and the Finance Ministry have reduced their growth predictions for this year, citing the impact of the European debt crisis. The economy expanded an annualized 3.2 percent in the fourth quarter compared with a revised 3.8 percent in the third quarter as exports and private consumption declined, the statistics bureau said Feb. 16.

The Tel-Bond 40 Index (TEL-B40) of corporate bonds gained less than 0.1 percent to 263.81. The shekel fell 0.3 percent to 3.7345 a dollar.

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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