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Israel Short-Term Bonds Rise on Bets Central Bank to Cut Rates

Israel’s short-term government bonds rose for the first time in six trading days, sending the yield lower on bets the Bank of Israel will need to cut interest rates in coming months as economic growth slows.

The yield on the 3.5 percent notes due August 2014 fell three basis points, or 0.03 percentage point, to 2.88 percent, the lowest since Feb. 7, at the 4:30 p.m. close in Tel Aviv. Shorter-term notes are typically more sensitive to rate fluctuations. One-year interest-rate swaps, an indicator of investor expectations for rates in the next 12 months, were unchanged at 2.45 percent.

The economy may expand “a little less” than 3 percent in 2012 as exports decline, the IMF said yesterday, reducing its estimate from 3.6 percent in September. The Bank of Israel, which lowered borrowing costs 25 basis points to 2.5 percent on Jan. 23, is willing to make further rate cuts if economic growth slows, Governor Stanley Fischer said Jan. 26.

“The downtrend in domestic activity and private consumption continues, while exports are weakening,” said Rafael Gozlan, chief economist at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “Furthermore in an environment of slowing inflation the central bank still has room to cut interest rates further which is needed to boost private consumption and growth.”

About 40 percent of the nation’s economy is based on exports, with Europe and the U.S. being the largest markets.

Inflation Eases

Consumer prices fell 0.2 percent last month after being unchanged in December, according to the median estimate of 10 economists in a Bloomberg survey. Inflation probably eased to an annual 1.9 percent from 2.2 percent, according to a survey of 12 economists. The statistics bureau will release the data tomorrow. Home prices fell about 1 percent in the fourth quarter from the previous one, the Justice Ministry said today.

The yield on the 5.5 percent notes due January 2022 was unchanged at 4.6 percent. Israel posted its widest trade deficit since at least 1995 in January as the European debt crisis weakened global growth and exports fell, the statistics bureau said Feb. 12.

The yield on the consumer price-linked notes due June 2013 fell four basis points to 0.21 percent. The one-year break-even rate, the difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, gained two basis points to 229. That implies an average annual inflation rate of 2.29 percent.

The shekel weakened for a third day, declining 0.4 percent to 3.7403 a dollar at 6:24 p.m. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 263.13.

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