Israel Benchmark Bonds Fall as Fischer Cautions on Budget Woes

Israel’s benchmark government bonds fell, lifting the yield to the highest in more than a week after Bank of Israel Governor Stanley Fischer raised concern about the country’s budget deficit outlook.

The yield on the 4.25 percent securities maturing March 2023 increased three basis points, or 0.03 percentage point, to 4.09 percent, matching the level on Feb. 5, at 1:10 p.m. in Tel Aviv. The yield on the 5.5 percent notes due Jan. 2022 rose four basis points to 3.85 percent.

Israel has significant longer-term economic issues, including the budget, Fischer said in Jerusalem today. The central bank projects the 2013 budget deficit, based on 3.8 percent growth, to be 3.6 percent of GDP, above the government’s target of 3 percent. Expenditures, forecast to be 9 percent greater than in 2012, must be curbed along with an “increase in tax rates or cancellation of exemptions”, the bank said today. The deficit may be 4.9 percent of GDP if steps are not taken, it said.

“Fischer as the adviser to the government is cautioning the government to take the necessary steps to contain a widening deficit,” said Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv. “The comments come at a critical time of coalition building when parties also put forward their budgetary demands.”

Prime Minister Benjamin Netanyahu is in the process of forming a coalition government together with Yair Lapid, the leader of the centrist second-place finisher in the Jan. 22 elections. Among the first items on the agenda will be to reduce the 2013 budget deficit. Netanyahu, who raised taxes last year to boost revenue, called early elections after failing to reach an agreement with coalition parties regarding spending cuts.

Slower Growth

Economic growth slowed to 3.3 percent last year from 4.6 percent in 2011, according to the Central Bureau of Statistics. To spur economic growth, the central bank lowered the key interest rate by 1.5 percentage points since September 2011 to 1.75 percent. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose one basis point to 1.73 percent.

Annual inflation, which unexpectedly accelerated to 1.6 percent in December from 1.4 percent a month earlier, may average 2.12 percent in the next two years, according to the two-year break-even rate. The rate, which reflects the yield difference between the inflation-linked bonds and similar- maturity fixed-rate government debt, was little changed at 212.

Israel’s shekel weakened as much as 0.1 percent to 3.6942 to the dollar before trading at 3.6897, trimming this month’s advance to 0.6 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, fell for a third day, retreating 0.1 percent to 282.91.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editor responsible for this story: Claudia Maedler at

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