Israeli Inflation-Linked Bonds Gain on Rate Cut, Consumer Prices

Israel’s inflation-linked bonds had the biggest monthly gain in more than a year after the central bank’s second rate cut in three months and shortages of natural gas fueled speculation that consumer prices will accelerate.

The yield on the consumer price-linked notes due June 2013 dropped five basis points, or 0.05 percentage point, to 0.6 percent at the 4:30 p.m. close in Tel Aviv. The rate has tumbled 37 basis points this month, the most since October 2010. The two-year breakeven rate, the yield difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, rose seven basis points to 208, implying an average annual inflation rate of 2.08 percent, the highest level since Sept. 8.

The central bank cut interest rates to 2.75 percent on Nov. 28 to cushion the economy from the impact of a European crisis. Natural-gas flow from Egypt to Israel was halted after an explosion on the Sinai pipeline network that delivers the fuel. The price of electricity in Israel may increase by 20 percent to 30 percent in 2012, DS Securities & Investments Ltd.’s Alex Zabezhinsky said.

“Inflation expectations are rising on bets the central bank will continue to lower interest rates in coming months which is expected to weaken the shekel and make imports more expensive,” Tel Aviv-based Zabezhinsky said by phone. “The gas explosion this week adds to expectations that prices will rise as it is becoming clearer that Israel can’t count on supply from Egypt and will have to switch to costlier alternatives.”

Shekel’s Worst Year

The shekel, which headed for its worst year since 2002, strengthened 0.6 percent to 3.7663 a dollar at 5:26 p.m. The currency has lost 3.8 percent this month and 6.4 percent in 2011. The yield on the 5.5 percent bonds due January 2022 increased two basis points, to 4.75 percent.

Israel’s unemployment rate rose in the third quarter for the first time in a year, climbing from its lowest level since at least 1985. The jobless rate was 5.6 percent in the three-month period ending Sept. 30, up from 5.5 percent in the second quarter, the Central Bureau of Statistics said today on its website.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, were little changed at 2.65 percent. Two out of 13 economists surveyed by Bloomberg forecast that the Bank of Israel will lower interest rates to 2.5 percent at its next meeting on Dec. 26. The remaining estimate the central bank will keep rates on hold.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate securities sold by local companies, rose 0.4 percent. The index dropped 2.4 percent in November, the largest monthly loss since December 2008.

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