Israel Bond Yield Drops to Record After Central Bank Rate Cut

Israel’s benchmark government bonds rose, pushing the yield to a record low, and the shekel weakened after the central bank unexpectedly cut its base lending rate to counter slowing economic growth.

The yield on the 5.5 percent government notes due January 2022 dropped four basis points, or 0.04 percentage point, to 3.65 percent at the 4:30 p.m. close in Tel Aviv, the lowest since the notes started trading in April 2011. The shekel depreciated 0.1 percent to 3.7471 a dollar, trimming the monthly gain to 1.8 percent.

Governor Stanley Fischer said today the central bank lowered the lending rate by a quarter-point to 1.75 percent, the lowest in more than two years, to encourage demand. The bank lowered its 2013 economic growth outlook to 2.8 percent from 3 percent, excluding gas output. Only nine of the 23 economists surveyed by Bloomberg had forecast a rate reduction.

“The Bank of Israel continues with its expansionary monetary policy as it sees the weakness of the local economy, in tandem with muted inflationary pressures,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers, said by phone. “For now, we believe the central bank will hold its rate unchanged in the coming rate decision, although we still see a chance for another rate cut in the first quarter of 2013.”

Gradual Reduction

The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shield the economy from the European debt crisis. Economic growth may slow to 3.3 percent this year from 4.6 percent in 2011, according to the central bank. Inflation slowed to 1.4 percent in November, the lowest since July and within the government’s 1 percent to 3 percent target range.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, have fallen 10 basis points this month to 1.72 percent. The country’s three-month central bank bills rose, sending the yield on the Makam notes down 13 basis points today to 1.83 percent. All of the nine analysts surveyed by Bloomberg today expect borrowing costs to remain unchanged at the next central bank meeting on Jan. 28.

The Tel-Bond 40 Index of corporate bonds advanced for a third day, increasing 0.2 percent to 280.42. The two-year break- even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, fell for the first time since Dec. 18, declining one basis point to 221. That implies an average annual inflation rate of 2.21 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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