Israeli Short-Term Bonds Drop as Demand Wanes on Rates, Europe

Israel’s short-term government bonds fell, driving yields to the highest in more than two weeks, after the central bank held borrowing costs for a third month amid concern Europe’s fiscal crisis is spreading.

The yield on the 5 percent notes due March 2013 rose two basis points, or 0.02 percentage point, to 2.62 percent, at the 4:30 p.m. close in Tel Aviv, the highest since April 5. Shorter-term maturities are typically more sensitive to rate fluctuations. One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, were unchanged at 2.58 percent. Local markets are closed tomorrow and April 26 to mark Memorial Day and Independence Day celebrations.

The Bank of Israel’s monetary policy committee, led by Governor Stanley Fischer, left the benchmark lending rate at 2.5 percent citing concerns over a “renewed worsening” of the debt crisis in Europe this month. All 23 economists surveyed by Bloomberg forecast the decision. Exports account for about 40 percent of gross domestic product, with Europe and the U.S. the largest markets.

“A deterioration of the debt crisis in Europe will have an impact on Israel’s export-driven economy,” said Amir Haik, chief economist at Union Bank of Israel Ltd., in Tel Aviv. “As a result the central bank is not likely to start raising rates in coming months but leave them on hold which is pushing yields on shorter-term bonds higher.”

The yield on the 5.5 Mimshal Shiklit notes due January 2022 rose one basis point to 4.69 percent. The two-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, fell one basis point to 292. That implies an average annual inflation rate of about 2.92 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, increased 0.2 percent to 267.71. The shekel gained 0.2 percent to 3.7541 a dollar at 4:51 p.m. in Tel Aviv, trimming this month’s decline to 1.2 percent.