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Israel Bond Yield Rises as Iran Tension Stokes Inflation Concern

March 1 (Bloomberg) -- Israel’s benchmarks bonds fell, pushing yields to the highest in more than two months, on concern that tension between Iran and the West may boost energy costs and fuel inflationary pressures.

The yield on the benchmark 5.5 percent bonds due January 2022 rose four basis points, or 0.04 percentage point, to 4.70 percent, matching the level on Dec. 14, at the 4:30 p.m. close in Tel Aviv. The one-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, fell six basis points to 270, implying an average annual inflation rate of 2.7 percent. The index jumped 69 basis points last month.

Israeli Prime Minister Benjamin Netanyahu will meet with U.S. President Barack Obama next week to discuss Iran’s possible pursuit of nuclear weapons. Israel raised the price of gasoline for March by 5.1 percent, according to a Ministry of Energy and Water Resources statement yesterday, following a 3.2 percent gain last month.

“The mounting threat of Iran and the risk of increasing oil prices is fueling inflation expectations,” said Gil Chen , a bond trader at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “Investors are shortening positions selling long-term bonds to reduce risk exposure.”

Brent crude, benchmark for more than half the world’s oil, rose 1 percent to $123.82 a barrel, having climbed to a 10-month high on Feb. 24. Crude oil rose 0.6 percent today to $107.66 a barrel in New York trading.

Inflation Accelerates

Consumer prices climbed an annual 2 percent in January, beating the median 1.9 percent estimate of economists. Inflation may reach 2.4 percent in the next 12 months, according to a survey of economists released by the Bank of Israel on Feb. 19. Accelerating inflation erodes the value of fixed-income securities.

One-year interest rate swaps, an indicator of investor expectations for rates over the period, gained five basis points to 2.52 percent, the highest since Dec. 12. The central bank’s monetary committee, led by Governor Stanley Fischer, left the benchmark lending rate for March unchanged at 2.5 percent last month.

The Tel-Bond 40 index of corporate bonds fell less than 0.1 percent to 263.78. Local funds attracted a net 1.4 billion shekels ($370 million) in February, compared with 1.8 billion shekels the previous month, Meitav Investment House Ltd. said today in an e-mailed report. Corporate-bond funds drew investments of 406 million shekels and government-bond funds raised 892 million last month, while 515 million shekels were redeemed from money-market funds, Meitav said.

The shekel weakened 0.2 percent to 3.7892 a dollar. The Bank of Israel will begin a pilot program today to invest a portion of its foreign currency reserves in U.S. equities. The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc.

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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