Israel’s benchmark bond climbed to the highest level in six months and stocks fell as investors sought the relative safety of government debt amid concern about global economic growth.
The yield on the 5.5 percent Mimshal Shiklit government notes due January 2022 slid six basis points, or 0.06 percentage point, to 4.54 percent at the 4:30 p.m. close in Tel Aviv. The rate on the 10-year bonds was at the lowest since November, according to generic-yield data compiled by Bloomberg. The TA-25 benchmark stock index slid 3.8 percent to 1,020.92, the lowest since Sept. 13.
“People are lowering their risk in shares and turning to government shekel bonds,” said Effi Cohen, a Tel Aviv-based trader at Leader Capital Markets Ltd. “As long as the crisis in Europe continues, it appears we will see a lowering of interest rates here in Israel and this will cause yields to fall.”
Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France. Europe’s worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May.
Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped four basis points to 2.72 percent, the lowest since September 2010. Bank of Israel Governor Stanley Fischer cut the benchmark interest rate last month by a quarter point to 3 percent as inflation slowed, growth eased and Europe, one of the country’s key export markets, grappled with its debt crisis.
‘Room to Ease’
The two-year breakeven rate, which reflects market expectations for inflation over the period, retreated four basis points to 174, implying an average annual inflation rate of 1.74 percent. Consumer prices may rise 2.3 percent in the next 12 months, according to the average of forecasters surveyed by the Bank of Israel, the bank said Sept. 20.
The Bank of Israel “has room to ease policy considerably going forward” based on inflation expectations, David Hauner head of Eastern Europe, Middle East and Africa economics at Bank of America Merrill Lynch in London, wrote in a report today.
Market inflation expectations have been “the best guide” to the Bank of Israel’s rate setting in recent years, Hauner wrote. These measures suggest room for 50 basis points to 100 basis points in further cuts, according to Hauner. Goldman Sachs said Sept. 27 the benchmark lending rate may decline to 2.5 percent by year end, while Citigroup Inc. forecast another quarter-point cut this year.
Inflation-linked bonds due June 2013 dropped for a third day, lifting the yield two basis points to 1.19 percent. The Tel-Bond 40 index of corporate bonds lost 0.6 percent.
The shekel strengthened for the first time in five days, gaining 0.3 percent, to 3.7494 per dollar at 5:32 p.m. in Tel Aviv, after Federal Reserve Chairman Ben S. Bernanke said the central bank stands ready to take additional steps to boost U.S. growth. The Israeli currency earlier touched 3.7730, the lowest in more than a year. While the shekel has lost 3.3 percent in the past 12 months, it’s still the second-best performer among 10 emerging markets in Europe, the Middle East and Africa tracked by Bloomberg.