Israel Short-Term Yield Slips to Record on Bets Rates to Fall

Israeli short-term government bonds rose, pushing yields on the August 2014 notes to the lowest since they were issued last year, on investor bets the Bank of Israel will cut the base lending rate in coming months.

The yield on the 3.5 percent notes due August 2014 fell four basis points, or 0.04 percentage point, to 2.55 percent at the 4:30 p.m. close in Tel Aviv. Shorter-term maturities are more sensitive to rate fluctuations. The shekel weakened 0.3 percent to 3.8673 a dollar at 4:54 p.m., bringing the monthly loss to 2.7 percent.

The central bank’s monetary policy committee, led by Governor Stanley Fischer, will hold the rate at 2.5 percent for a fourth consecutive month, according to 22 out of 24 economists surveyed by Bloomberg News. Two predicted a quarter-point cut. The bank will announce the decision at 5:30 p.m. One-year interest-rate swaps, an indicator of investor expectations for rates over the period that rose one basis point to 2.28 percent, has dropped 32 basis points this month.

“It is a tough call this month as there is more downside risk from the global economic environment,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc. “The central bank may save its ammunition this time to see how Europe’s debt crisis develops and start lowering borrowing costs in the next two months, which is pushing yields lower.”

Europe’s Crisis

Europe, which accounts for about 35 percent of Israeli exports, has been in the grips of a debt crisis for three years. Economic growth in Israel will slow to 3.1 percent this year from 4.8 percent in 2011, central bank forecasts show

The yield on the 5.5 percent benchmark bonds fell one basis point to 4.44 percent. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, increased less than one basis point to 241. That implies an average annual inflation rate of 2.41 percent over the period.

Israeli funds raised a net 132 million shekels ($34 million) from investors in the week ended May 24, Tel Aviv-based Meitav Investment House Ltd. said today. Local government bond funds drew investments of 166 million shekels, while corporate-bond funds redeemed 8 million shekels and money market funds redeemed 545 million shekels, Meitav said in an e-mailed report.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.2 percent to 264.41.

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