Israel CPI Bonds Rise as Price Increases Boost Inflation Bets

Israel’s inflation-linked government bonds due 2017 rose, pushing yields to the lowest level in more than a week, on investor bets consumer prices will increase in coming months as taxes and food costs rise.

The yield on the 1 percent consumer price-linked notes due May 2017 fell five basis points, or 0.05 percentage point, to 0.478 percent at the 4:30 p.m. close in Tel Aviv, the lowest since Aug. 8. The one-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, gained two basis points to 302, implying an average annual inflation rate of 3.02 percent over the period. The government’s target range is between 1 percent to 3 percent.

The nation’s parliament this month approved an increase in value-added and income taxes, while Finance Minister Yuval Steinitz last month raised taxes on beer and cigarettes. Food costs, including dairy, poultry and egg prices, are set to rise by year’s end, Israel’s Ministry of Agriculture said Aug. 15.

“Inflation expectations are moving up as taxes are rising and a number of prices from food to energy costs are expected to increase in coming months,” said Ori Greenfeld, head of macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv. “The expectations are pushing yields on inflation-linked government bonds down.”

Inflation Accelerates

Israeli gasoline prices rose 5.9 percent on Aug. 1. The country imports almost all of its needed oil and crude prices are trading at the highest level since May 11 as U.S. consumer confidence improved, signaling the economy is recovering, and rising tension in the Middle East.

The yield on the 5.5 percent Mimshal Shiklit government bonds due January 2022 fell one basis point to 4.28 percent. Inflation accelerated to 1.4 percent in the 12 months through July, from 1 percent last month, the Central Bureau of Statistics said Aug. 15.

The Tel-Bond 40 Index of corporate bonds gained 0.4 percent to 267.59, the highest since Aug. 9. The shekel weakened 0.1 percent to 4.0320 a dollar on Aug. 17. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, increased one basis point to 2.15 percent on Aug. 17.

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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