Israel’s Riskier Assets Gain as Lending Rate Drops to 2-Year Low

Demand for higher-yielding assets fueled annual gains in Israel’s debt and equity markets as the central bank cut interest rates to a two-year low and the economy grew faster than the country’s key trading partners.

The Tel-Bond 40 Index of corporate bonds soared 9 percent this year as the benchmark TA-25 index of stocks rallied 9.1 percent, recovering from an 18 percent loss in 2011. Benchmark government bonds rose 6.8 percent, more than doubling the gain in 2011. The central bank, led by Governor Stanley Fischer, last week cut borrowing costs for a fourth time this year, to 1.75 percent.

Inflation slowed to 1.4 percent in November, the lowest since July and within the government’s 1 percent to 3 percent target range. The country’s export-driven economy expanded 3.4 percent year-on-year compared with growth of 2.6 percent in the U.S. and contraction of 0.6 percent in the euro-area, its two main trading partners.

“The surprise moderation in inflation in the second half of the year prompted the central bank to lower interest rates, leaving investors seeking riskier assets,” said Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv. “Looking to 2013, the bank may have room for another rate-cut.”

The yield on the 5.5 percent government bonds due January 2022, fell to a record 3.62 percent at 12 p.m. in Tel Aviv, more than double the 1.70 percent yield of similar-maturity U.S. Treasuries and almost three times the benchmark German bund yield of 1.31 percent.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 1.63 percent, the lowest since July 2009. The swaps slumped 77 basis points this year, the most since 2008.

The shekel gained 2.3 percent this month, the sixth-best performer among an expanded list of 31 major currencies tracked by Bloomberg. The currency was little changed at 3.7311 today.

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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