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Israel Short-Term Bonds Decline as Interest Rates Seen on Hold

March 6 (Bloomberg) -- Israel’s short-term government bonds declined, pushing yields to the highest level in more than two months, on speculation the central bank will leave borrowing costs on hold for a second month as energy costs spur inflation.

The yield on the 3.5 percent notes due September 2013 climbed five basis points, or 0.05 percentage point, to 2.7 percent at the 4:30 p.m. close in Tel Aviv, the highest since Dec. 29. Shorter-term notes are typically more sensitive to rate fluctuations. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, increased two basis points to 2.55 percent, the highest level since Dec. 7.

The Bank of Israel will keep the benchmark interest rate this month at 2.5 percent, according to all but one of 17 analysts in a Bloomberg survey. Israel raised the price of gasoline for March by 5.1 percent, following a 3.2 percent gain last month, the government said on Feb. 29. Oil has risen 6.4 percent this year.

“Inflation expectations have increased over the past weeks amid rising oil prices which will make it hard for the central bank to lower borrowing costs,” Ori Greenfeld, head of the macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv, said by telephone. “The market is pricing in that the central bank will pause on rates at the end of the month.”

Yields Rise

The central bank’s monetary committee, led by Governor Stanley Fischer, held rates in February, after cutting it three times in the past five months. The employment rate among ultra-Orthodox Jewish men rose to 45.6 percent in 2011 from 38.7 percent in 2009, the central bank said in an excerpt from its annual report sent by e-mail today. The government has set a target of 63 percent employment for this population in 2020.

The yield on the benchmark 5.5 percent bonds due January 2022 gained one basis point to 4.7 percent. The one-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, advanced two basis points to 281, the highest since July 31. That implies an average annual inflation rate of 2.81 percent.

The Tel-Bond 40 index of corporate bonds declined 0.5 percent to 262.50. The shekel weakened 0.5 percent to 3.8115 a dollar at 5:17 p.m. in Tel Aviv, bringing the past month’s decline to 2.4 percent.

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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