Israel Bond Gains as New Taxes Boost Rate Bets; Shekel Rises

Israel’s benchmark bonds advanced, pushing yields down for the first time this week, as government measures to contain a widening deficit increased bets borrowing costs will fall in coming months.

The yield on the 5.5 percent Mimshal Shiklit notes dropped two basis points, or 0.02 percentage point, to 3.98 percent at 10:54 a.m. in Tel Aviv. The yield has plunged 34 basis points this month, poised for the biggest monthly drop since August. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 1.99 percent. The swaps have dropped 15 basis points this month.

Israeli Prime Minister Benjamin Netanyahu’s Cabinet approved late yesterday a plan to increase taxes and cut spending in an effort to contain the deficit. The Cabinet voted on July 1 to double the deficit target for next year to 3 percent of gross domestic product from the originally planned 1.5 percent as economic growth rate fell to its lowest in almost three years.

“The approval of the steps provides more confidence to the market that the government is dealing with a widening deficit,” said Effi Cohen, a bond trader at Leader Capital Markets (LDRC) Ltd. in Tel Aviv. “We are likely to see interest rates coming down further in coming months as the risk associated with a ballooning deficit is moderated, which is supporting government bonds.”

Under the state’s plan, approved by a vote of 20 to 9, value-added tax will be raised by one percentage point to 17 percent beginning tomorrow. Income tax will rise in 2013 by one percentage point for most tax brackets, and by two points for those who earn 67,000 shekels ($16,634) or more a month. Last week, Finance Minister Yuval Steinitz announced a tax increase on beer and cigarettes.

The central bank will probably lower interest rates by 25 basis points to 2 percent at its meeting Aug. 27, according to six out of 13 economists in a Bloomberg survey. The remainder forecast rates to remain unchanged. The bank on July 23 held the rate at 2.25 percent citing “economic risks” and “uncertainty in fiscal policy.”

Rate Cuts

The shekel rose 0.4 percent to 4.0305 a dollar. The currency has dropped 3 percent this month, the third-worst performer among the 10 most-active currencies in Europe, the Middle East and Africa, according to data compiled by Bloomberg.

Economic growth will slow to 3.1 percent this year from 4.8 percent in 2011, central bank forecasts show. The slowdown has reduced tax revenue, creating a 2.9 billion-shekel shortfall in the first six months of the year, the Finance Ministry said on July 4.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, fell for the first time since July 16, retreating one basis point to 230. That implies an average annual inflation rate of 2.30 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.1 percent to 266.26.

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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