Israel Short-Term Bonds Drop to 2-Week Low on Interest Rate Bets

Israel’s short-term government bonds dropped, pushing yields to the highest in more than two weeks, on investor bets borrowing costs will remain unchanged in coming months on renewed concern about the global economy.

The yield on the 4.25 percent notes due January 2015 rose two basis points, or 0.02 percentage point, to 3.02 percent, matching the level on April 5, at the 4:30 p.m. close in Tel Aviv. Shorter-maturity notes are typically more sensitive to interest rate changes. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, were unchanged at 2.57 percent on April 20. The swaps gained 17 basis points this year.

The Bank of Israel’s policy committee, led by Governor Stanley Fischer, will hold the benchmark rate at 2.5 percent for a third month tomorrow, according to all 23 economists in a Bloomberg survey. Spanish notes fell last week, extending the longest run of weekly declines since January 2007, as the Group of 20 nations said Europe’s sovereign debt crisis poses a threat to global growth. About 40 percent of Israel’s gross domestic product is made up of exports, with Europe and the U.S. the largest markets.

“Interest rates are likely to remain at the current level for a prolonged period which is pushing yields higher,” said Rafael Gozlan, chief economist at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “Higher inflation expectations may call for a rate increase. However, renewed concern about the global economic recovery which is likely to have an impact on local exports and growth may postpone that decision.”

Annual Inflation

The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, declined three basis points to 296. That implies an average annual inflation rate of 2.96 percent. Inflation is expected to reach 2.5 percent in the next 12 months, according to a survey of economists released by the Bank of Israel last week. The government’s target range for inflation is 1 percent to 3 percent.

The yield on the 5.5 percent benchmark notes due January 2022 rose one basis point to 4.67 percent, the highest since April 5. The Finance Ministry plans to sell a combined 1.4 billion shekels ($373 million) of bonds at an auction tomorrow, including 250 million shekels each of the benchmark notes and the 3.5 percent bonds due August 2014, according to ministry data posted on Bloomberg. The government will also offer 250 million shekels of inflation-linked bonds due May 2017.

The Tel-Bond 40 Index of corporate bonds gained 0.2 percent to 268.09. The shekel strengthened 0.2 percent to 3.7502 a dollar on April 20.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE