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Israel’s Benchmark Yield Drops to 5-Week Low on Rate-Cut Bets

Israel’s benchmark government bonds rose, pushing the yield to the lowest in almost five weeks, and the shekel weakened on bets the central bank will lower interest rates next month to boost economic growth.

The yield on the 4.25 percent government notes due March 2023 dropped three basis points, or 0.03 percentage point, to 3.97 percent at 12:45 p.m. in Tel Aviv, the lowest since Jan. 24. The shekel depreciated 0.2 percent to 3.7332 a dollar. It earlier fell to 3.7418 a dollar, the lowest since Jan. 29.

The Bank of Israel unexpectedly held the key interest rate at 1.75 percent, the lowest in more than two years. Twelve of 22 economists surveyed by Bloomberg had forecast a quarter-point rate reduction, while the remainder predicted the decision. Economic growth eased to an annualized 2.5 percent in the fourth quarter, the slowest since the second quarter of 2009, as exports fell.

“The Bank of Israel held on to its ammunition yesterday and will likely cut rates next month should weak economic indicators persist,” Sagie Poznerson, head of trading at Leader Capital Markets (LDRC) Ltd. in Tel Aviv, said by phone. “The market is still pricing in another rate cut as bonds are up today.”

The central bank has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shield the economy from the European debt crisis. In yesterday’s decision, the regulator’s monetary policy committee cited a jump in home prices as part of its decision to hold rates. In the 12 months ending in December, home prices increased 6.7 percent, compared with 5.8 percent in the year to November, the bank said. The volume of new mortgages taken also continued to grow, it said.

Seeking Safety

Investors also bought government bonds after inconclusive election results in Italy triggered renewed concern that Europe’s sovereign-debt crisis will intensify, sending Italian 10-year yields up the most in 14 months, Poznerson said. Israeli exports fell an annualized 6.5 percent last quarter amid the debt crisis in Europe, the destination for 34 percent of the country’s goods.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, declined one basis point to 1.61 percent. Inflation is also leaving room for lower interest rates after the rate slowed to 1.5 percent in January, below the 1.6 percent median estimate of 11 analysts surveyed by Bloomberg. The government has set a 1 percent to 3 percent target range.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, was little changed at 221. That implies an average annual inflation rate of 2.21 percent. The Tel-Bond 40 Index of corporate bonds fell for a second day, retreating 0.1 percent to 283.51.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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