Israel Bonds Fall as Pipeline Blast Spurs Electricity Price Bets

Israel’s government bonds declined, pushing yields higher for the first time in four days, as a blast on a gas pipeline from Egypt to Israel spurred bets electricity costs will keep rising and stoke inflation.

The yield on the 4.5 percent bond due January 2015 rose two basis points, or 0.02 percentage point, to 2.92 percent at the 2:45 p.m. close in Tel Aviv. Israeli markets closed early due to the Passover holiday. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, advanced three basis points to 287. That implies an average annual inflation rate of 2.87 percent in the period, at the higher end of the Bank of Israel’s 1 percent to 3 percent target range.

An explosion today hit a pipeline that exports the natural gas from Egypt’s Sinai Peninsula to Israel and Jordan, the 14th blast on the line since the ouster of President Hosni last year, the Middle East News Agency reported today. The Public Utility Authority cited gas shipment disruptions as one factor behind a 9 percent rise in electricity prices at the end of March.

“As we are continuing to see disruptions in the gas supply from Egypt there is less of a chance future increases in electricity prices will be canceled,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc. “A continued increase in these prices will also push other prices higher such as water.”

The yield on the benchmark Mimshal Shiklit bond due January 2022 increased for the first time in three days, gaining one basis point to 4.64 percent. Accelerating inflation erodes the value of fixed-income securities.

Inflation Risk

Consumer prices are likely to increase 2.9 percent in the coming year, Katz said.

Inflation in the next four quarters will reach 2.6 percent, according to the central bank’s research department. Israel Electric Corp.’s ilAA- rating was put on credit watch negative at Standard & Poor’s Maalot on April 5 due to “liquidity pressure” because of the lack of gas supply from Egypt and shrinking domestic reserves.

The shekel fell 0.3 percent to 3.75 a dollar at 3:30 p.m. in Tel Aviv. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 2.54 percent.

The Tel Aviv Bond 40 Index, a measure of inflation-linked and fixed-rate corporate bonds, fell for the first time in three days, declining less than 0.1 percent to 265.59.

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