Israel’s 5-Year CPI Bonds Jump After Unexpected Inflation Pickup

Israel’s consumer price-linked government bonds due 2017 rose, pushing the yield to the lowest level this year, on bets an unexpected acceleration in inflation may signal greater price pressures.

The yield on the 1 percent securities dropped four basis points, or 0.04 percentage point, to 0.18 percent at 11:46 a.m. in Tel Aviv, the lowest on a closing basis since Dec. 31. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, soared 14 basis points to 212, implying an average annual inflation rate of 2.12 percent over the period.

Annual inflation was 1.6 percent last month, Central Bureau of Statistics data showed late yesterday, surpassing the 1.4 percent median estimate of 13 economists surveyed by Bloomberg. The rate accelerated from 1.4 percent in November and falls within the government’s target range of 1 percent to 3 percent.

“Rental prices and food costs rose more than expected and we may see this trend continue in the first half of this year,” said Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv. “The expectations are providing support for shorter-term inflation-linked government bonds and are reducing the likelihood that the central bank will cut interest rates.”

The Bank of Israel lowered the base lending rate by a quarter-point to 1.75 percent in December, the second reduction in three months, as the regulator seeks to spur economic growth. The nation’s economy expanded 3.3 percent in 2012, down from 4.6 percent a year earlier, the statistics bureau’s preliminary data showed Dec. 31.

Inflation Outlook

Economists’ 12-month inflation expectations had fallen to 1.8 percent, on average, in December from 1.9 percent a month earlier, the central bank said on Dec. 18. One-year interest- rate swaps, an indicator of investor expectations for rates over the period, increased for the first time in four days, adding less than one basis point to 1.7 percent today.

The yield on the nation’s benchmark 4.25 percent government bonds was unchanged at 3.96 percent after rising 11 basis points this month.

The Tel-Bond 40 Index of corporate bonds climbed for a second day, increasing 0.1 percent to 282.20. The shekel weakened for a second day, declining 0.1 percent to 3.7309 a dollar.

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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