Israel Bonds Rally on Surprise Inflation Drop as Truce Bid Grows

Israel’s benchmark bonds rallied, pushing the yield down the most in almost three weeks, as a surprise drop in inflation spurred demand and regional leaders raced to broker a truce between Israelis and Palestinians.

The yield on the 5.5 percent Mimshal Shiklit bonds due January 2022 fell six basis points, or 0.06 percentage point, the biggest decline since Oct. 30, to 3.95 percent at the close in Tel Aviv. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government notes of similar maturity, slumped 28 basis points to 205, implying an average annual inflation rate of 2.05 percent.

Annual inflation slowed to 1.8 percent in October from 2.1 percent the previous month, the Central Bureau of Statistics said on Nov. 15 after markets closed. That was below the 2.2 percent median estimate of 14 analysts in a Bloomberg survey. Egyptian President Mohamed Mursi said late yesterday that there are indications an agreement to halt the fighting that killed 60 Palestinians and three Israelis may be reached. The benchmark yield rose nine basis points last week amid the tension.

“The market is adjusting inflation expectations downwards after consumer prices came out lower than forecast as consumer demand and economic growth slows,” said Avihay Hermon, a bond trader at Psagot Investment House Ltd. in Tel Aviv. “There aren’t any inflationary pressures at the moment, which is prompting investors to sell consumer price-linked bonds and buy non-linked government bonds.”

The yield on the 1 percent inflation-linked notes due May 2017 rose five basis points to 0.368 percent, highest since Oct. 29. Israel’s economic growth slowed to an annualized 2.9 percent in the third quarter from 3.4 percent in the previous three months, the statistics bureau said today. Seven analysts had forecast growth of 3.4 percent.

Lower Rates

The European debt crisis and slower global expansion has weighed on Israel’s economy this year, with growth likely to slow to 3.5 percent this year from 4.6 percent in 2011, according to the bureau’s forecasts in September. More than 40 percent of Israel’s gross domestic product is made up of exports and Europe is one of the top destinations.

The Bank of Israel lowered the benchmark interest rate to 2 percent at the end of October, citing a high level of global economic risk and slowing domestic growth. Two-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, plunged six basis points, the biggest decrease since Oct. 29, to 1.97 percent on Nov. 16.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, declined for a third day, slipping 0.1 percent to 278.79. Local funds raised a net 702 million shekels ($177 million) in the week ended Nov. 15, 40 percent less than in the previous week, Meitav Investment House Ltd. said today.

The shekel strengthened 0.3 percent to 3.9664 a dollar on Nov. 16, trimming last week’s decline to 1.3 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: Alaa Shahine at asalha@bloomberg.net

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