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Israel CPI Bonds Drop as Slower Growth Reduces Inflation Bets

Israel’s consumer price-linked bonds maturing in 2017 declined, lifting yields up the most in three weeks, on speculation inflation will slow as economic growth eases amid Europe’s sovereign debt crisis.

The yield on the 1 percent inflation-linked notes due May 2017 rose three basis points, or 0.03 percentage point, the most since July 11, to 0.34 percent at 2:24 p.m. in Tel Aviv. The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, declined less than one basis point to 225. That implies an average annual inflation rate of 2.25 percent.

Bank of Israel Governor Stanley Fischer said today the country must take steps to prepare for the possibility of a euro-zone collapse. Israel’s economy, which gets about 40 percent of its gross domestic product from exports, will slow to 3.1 percent this year from 4.8 percent in 2011, central bank forecasts show.

“Inflation is expected to moderate as the situation in Europe is not getting better,” said Oren Ossad, a trader at Excellence Nessuah Investment House Ltd., in Ramat Gan, Israel. “This environment is pushing yields up on consumer price-linked bonds.”

The yield on the 5.5 percent benchmark notes due January 2022 fell two basis points to 3.92 percent, the lowest since the notes were sold in March 2011. The yield declined 38 basis points in July. Consumer price growth slowed to 1 percent in the 12 months through June, the lowest since August 2007, compared with 1.6 percent the previous month, the Central Bureau of Statistics said July 15.

The shekel increased 0.6 percent to 3.9595 a dollar. The currency weakened 1.9 percent in July. Fischer said at a parliamentary committee meeting in Jerusalem today that the recent weakening of the shekel may help exports, which have declined in recent months.

One-year interest rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 1.94 percent. The Tel-Bond 40 Index of corporate bonds rose for a fifth day, adding 0.2 percent to 267.27.

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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