Israel’s consumer price-linked bonds rose to the highest level in more than three weeks amid bets inflation will accelerate as electricity prices rise.
The yield on the CPI-linked bond due June 2013 dropped five basis points, or 0.05 percentage point, to 0.55 percent at the 4:30 p.m. close in Tel Aviv, the lowest since Dec. 15. The two-year break-even rate, the rate difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, gained for a second day, increasing five basis points to 194. That implies an average annual inflation rate of 1.94 percent.
Electricity prices surged 4.7 percent in November, after attacks on a gas pipeline from Egypt interrupted supply, raising costs for power production. Israel will extend the reduced tax rate on diesel fuel for power production by one year to help keep a planned increase in electricity prices to a minimum, the Finance Ministry said Jan. 5.
“Electricity prices, which are expected to increase by 9 percent in February, will boost inflationary pressure in coming months,” said Gil Chen, a bond trader at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv.
I.B.I. raised its 12-month inflation forecast today to 2.6 percent from 2.4 percent, citing a wave of price increases including electricity and cigarettes, as well as shekel weakness. Consumer prices rose 2.6 percent in November from a year earlier, the smallest increase in a year, the Central Bureau of Statistics said Dec. 15. The government’s target range is between 1 percent to 3 percent.
The shekel, down 7.5 percent last year, its worst performance since 2001, weakened 0.2 percent to 3.8527 a dollar on Jan. 6.
Israel plans to auction 200 million shekels ($52 million) in 30-year bonds tomorrow, the longest maturity in the local market. The yield on the 6.25 percent bonds due October 2026, rose two basis points to 4.97 percent.
“Some institutional investors may be selling today as they are waiting to buy the longer bond tomorrow,” said Assaf Rosenberg, head of fixed-income sales at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel.
The yield on the 5.5 percent notes due January 2022 rose two basis points to 4.53 percent. Local funds raised 590 million shekels from investors in the week ended Jan. 5, Meitav Investment House Ltd. said today. Government-bond funds pulled in 190 million shekels and stock funds raised 30 million shekels, Meitav said.
The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, gained 0.2 percent. Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose two basis points to 2.46 percent on Jan. 6.