Israel 2022 Bond Falls as Rates Seen on Hold Amid Faster Growth

Israel’s benchmark government bonds fell, pushing yields higher for the first time in more than a week, on investor bets the Bank of Israel will keep interest rates unchanged tomorrow as economic growth accelerates.

The yield on the 5.5 percent notes due January 2022 increased for the first time since Aug. 16, gaining one basis point, or 0.01 percentage point, to 4.14 percent at the close in Tel Aviv. The central bank’s monetary policy committee, led by Governor Stanley Fischer, will hold interest rates at 2.25 percent, according to 21 out of 25 economists surveyed by Bloomberg News. Four economists forecast borrowing costs will fall by 25 basis points.

Israeli economic growth accelerated for the first time in a year and a half in the second quarter, driven by an increase in exports and consumer spending. The economy expanded an annualized 3.2 percent compared with a revised 2.8 percent in the first three months of the year, the Jerusalem-based Central Bureau of Statistics said Aug. 16.

“Economic growth in the second quarter was fairly robust and some of the recent global economic data point to signs of stability which gives the central bank less of a reason to lower interest rates tomorrow,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc. “This environment is pushing government bond yields up.”

Yields Climb

U.S. consumer spending probably rose in July by the most in five months, easing concern the biggest part of the economy is backsliding, economists said before a report this week. About 40 percent of Israel’s gross domestic product is made up of exports, with the U.S. among the largest markets.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, gained three basis points to 270. That implies an average annual inflation rate of 2.7 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 266.88. Israeli funds raised a net 107 million shekels ($27 million) from investors in the week ended Aug. 23, Meitav Investment House Ltd. said today. Investments last week included money- market funds pulling in 333 million shekels, Tel Aviv-based Meitav said.

Two-year interest rate swaps, an indicator of investor expectations for rates over the period, were unchanged at 2.12 percent on Aug. 24. The shekel weakened 0.3 percent to 4.0258 against the dollar, widening this month’s loss to 1 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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