Israel CPI-Linked Bonds Drop on Inflation Bets; Shekel Weakens

Israel’s consumer price-linked government bonds maturing in 2019 dropped, driving yields higher for a third time this week, on investor bets inflation will moderate as energy costs decline and economic growth slows.

The yield on the 3 percent inflation-linked notes due October rose one basis point, or 0.01 percentage point, to 1.61 percent, at 11:43 a.m. in Tel Aviv. The two-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, was little changed at 244, implying an average annual inflation rate of about 2.44 percent.

Israel imports almost all of its oil needs and crude prices are down 16 percent this year as the outlook for oil consumption was clouded by Europe’s debt crisis and faltering growth in emerging nations. Economic growth in Israel is expected to slow to 3.1 percent this year from 4.8 percent in 2011, according to central bank estimates. The trade deficit narrowed in May to its lowest this year as fuel prices declined, the Central Bureau of Statistics said yesterday.

“Consumer prices are expected to moderate as energy prices are dropping,” said Ori Greenfeld, head of the macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv. “Looking ahead, we are also seeing deflationary pressure coming from a slowdown in the local economy and an expected rise in unemployment.”

Swaps Rise

Consumer prices probably advanced 0.4 percent in May from a gain of 0.9 percent the previous month, Greenfeld said. Inflation data is scheduled to be released on June 15.

The yield on the 5.5 Mimshal Shiklit notes due January 2022 rose one basis point to 4.44 percent. One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, increased three basis points to 2.28 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 264.42. The shekel weakened 0.1 percent to 3.8819 a dollar, trimming this month’s gain to 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

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