Israel Bond Rises to Record on Rate Cut Bets and Shekel Gains

Israel’s government bonds rose, pushing the yield down to a record, as inflation slowed and a surprise interest reduction spurred bets the central bank could follow with another rate cut.

The yield on the 4.25 percent notes due in March 2023 fell four basis points, or 0.04 percentage point, to 3.47 percent at 12:59 p.m. in Tel Aviv. The shekel rebounded from the biggest five-day slump since September 2011, rising 0.4 percent to 3.6445 a dollar. Governor Stanley Fischer cut interest rates on May 13, and announced a program to buy foreign currency to curb the shekel’s appreciation. The currency has strengthened 8.8 percent in the past six months, making it the best performer among 31 major currencies tracked by Bloomberg.

“Fischer’s move shows that the central bank is determined to fight shekel appreciation, increasing the likelihood for more rate cuts in coming months,” Yshai Shilo, a fixed-income broker at I.B.I.-Israel Brokerage & Investments Ltd., said by phone from Tel Aviv. “The low inflation data also supports a quarter-point rate-cut as early as the end of the month.”

Annual inflation slowed to 0.8 percent last month, falling below the government’s 1 percent to 3 percent target for the first time since July 2007, the statistics bureau said May 14. That matched the median estimate of 14 analysts on Bloomberg. The central bank will lower rates to 1.25 percent at its next rate decision meeting on May 27, according to two of six analysts in a Bloomberg survey. The remainder expect no change.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, has dropped 21 basis points this week. It rose two basis points to 1.34 percent today.

Fischer, who will step down in June, has gradually cut interest rates from 3.25 percent in 2011 to 1.5 percent, to boost the economy amid the European debt crisis.

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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