Israel Benchmark Yield Drops to 2-Week Low on Deficit Risk Bets

Israeli benchmark government bonds rose, pushing the yield down to the lowest in more than two weeks, on bets Finance Minister Yair Lapid will take steps to meet the deficit target.

The yield on the 4.25 percent benchmark notes due March 2023 dropped four basis points, or 0.04 percentage point, to 3.96 percent, the lowest since March 7, at 1:25 p.m. in Tel Aviv. The shekel strengthened to a 17-month high, gaining 0.3 percent to 3.6550 a dollar on March 22 as Israel renewed diplomatic ties with Turkey.

Lapid, who was last week sworn in, wrote on his Facebook page, that cuts will have to be made “where it hurts” to deal with overspending. Prime Minister Benjamin Netanyahu called for early elections last year after his coalition partners refused to approve 14 billion shekels ($3.8 billion) in budget reductions to meet a deficit target of 3 percent of economic output. The central bank will today announce the benchmark rate for the next two months.

“Lapid’s comments point to a fiscally responsible policy going forward which will include making necessary cuts,” said Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv. “Reduced risk to the deficit is pushing government yields down.”

The country last year posted a current-account deficit of $199 million, compared with a revised surplus of $3.4 billion in 2011 and $8.1 billion in 2010, the Central Bureau of Statistics said March 14. The shekel strengthened as Netanyahu and his Turkish counterpart Recep Tayyip Erdogan agreed to normalize ties and reinstate ambassadors. The currency rose 1.6 percent this month, the third-best performer among 31 major currencies tracked by Bloomberg.

Rate Decision

The Bank of Israel, which has gradually cut its borrowing rate to 1.75 percent from 3.25 percent in 2011 to boost economic growth, will probably leave the rate steady at today’s Monetary Policy Committee meeting, according to 16 out of 21 analysts in a Bloomberg survey. The remainder forecast a quarter-point cut to 1.5 percent.

“We may see the central bank save its ammunition this time and cut the lending rate in coming months to stem the shekel rally,” said Kahanovich.

Economic surveys indicate an “improvement in expectations of economic activity in the business sector” and the most- recent monthly indicators show a possibility that there was some improvement in January activity, according to the central bank minutes of the last rate decision on March 11.

Israel’s annual inflation rate remained at 1.5 percent in February from the previous month, the statistics bureau said March 15. The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, was little changed at 261. That implies an average annual inflation rate of 2.61 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.1 percent to 284.23.

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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