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Shekel Gains Most Since May 2011, Bonds Rise on Deficit Steps

July 31 (Bloomberg) -- Israel’s shekel soared the most in more than a year and benchmark bond yields fell to the lowest on record as the government approved measures to contain a widening deficit.

The shekel jumped 1.4 percent to 3.9880 a dollar at 4:35 p.m. in Tel Aviv. The currency earlier surged as much as 1.7 percent, the biggest intraday increase since May 2011. The currency is the biggest gainer among an expanded list of 31 currencies tracked by Bloomberg. The yield on the 5.5 percent Mimshal Shiklit notes dropped six basis points, or 0.06 percentage point, to 3.94 percent at the close, the lowest since the notes were sold in March 2011. The yield plunged 38 basis points this month, the biggest monthly drop since August.

Israeli Prime Minister Benjamin Netanyahu’s cabinet approved yesterday a plan to increase taxes and cut spending in an effort to contain the deficit. The Cabinet voted July 1 to double the deficit target for next year to 3 percent of gross domestic product from the originally planned 1.5 percent as the economic growth rate fell to the lowest in almost three years.

“The government provided a fairly swift response to dealing with a ballooning deficit, taking a responsible and long-term approach while countries around the world are failing to manage debt risk,” said Tal Zohar Avda, chief executive officer of FXCM LLC’s Israel unit. “Investors are seeing this move as positive action driving support of the shekel.”

Tax Increase

Value-added tax will be raised by one percentage point to 17 percent on Sept. 1. Income tax will rise in 2013 by one percentage point for most tax brackets, and by two points for those who earn 67,000 shekels ($16,770) or more a month. Last week, Finance Minister Yuval Steinitz announced a tax increase on beer and cigarettes.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped four basis points to 1.96 percent. The swaps have declined 18 basis points this month. The central bank will probably lower interest rates by 25 basis points to 2 percent at its meeting Aug. 27, according to six out of 13 economists in a Bloomberg survey. The remainder forecast rates to remain unchanged. The bank on July 23 held the rate at 2.25 percent citing “economic risks” and “uncertainty in fiscal policy.”

The jobless rate rose to 7.2 percent in June to its highest this year, from 7.1 percent the previous month, the Central Bureau of Statistics said today. Economic growth will slow to 3.1 percent this year from 4.8 percent in 2011, central bank forecasts show. The slowdown has reduced tax revenue, creating a 2.9 billion-shekel shortfall in the first six months of the year, the Finance Ministry said on July 4.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, fell for the first time since July 16, retreating four basis points to 226. That implies an average annual inflation rate of 2.26 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.4 percent to 266.84.

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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