Israel Bond Yield Drops Before Interest Rate Call; Shekel Falls

Israeli benchmark bonds rose, pushing the yield lower for a second day, on speculation the central bank will keep borrowing costs unchanged today to stimulate the economy.

The yield on the 5.5 percent Mimshal Shiklit notes maturing in January 2022 fell one basis point, or 0.01 percentage point, to 4.07 percent at the 4:30 p.m. close in Tel Aviv. The rate dropped 14 basis points this month. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped one basis point to 2.13 percent, the lowest since Oct. 16.

Policy makers will probably keep the key interest rate unchanged today at 2.25 percent for a fourth consecutive month, according to all 24 analysts surveyed by Bloomberg. Israel’s economic growth is set to decline to 3.5 percent this year from 4.6 percent in 2011, according to statistics bureau estimates, as Europe contends with a debt crisis and global growth slows. Exports comprise 40 percent of Israel’s gross domestic product, and Europe is one its top markets.

“The Bank of Israel is expected to leave interest rates low for a longer period as the economy grows at a moderate pace and inflation is intact,” said Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv. “This environment is giving preference to longer-term bonds over shorter-term.”

Bond Auction

The Finance Ministry sold a combined 1.55 billion shekels ($399 million) in bonds today, bringing this month’s fundraising total to 6 billion shekels, according to ministry data posted on Bloomberg. Investors sought 7.9 times the 200 million shekels of 3.5 percent bonds due August 2014 on sale compared with 9.9 times at the last auction on Oct. 22. The yield on the notes increased one basis point to 2.21 percent.

The central bank, which will announce its rate decision at 5:30 p.m. local time, lowered the base lending rate from 3.25 percent from September 2011 through June. Annual inflation accelerated to 2.1 percent in September, less than expected, the statistics bureau said Oct. 15. The government’s target range is 1 percent to 3 percent.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, declined four basis points to 230, implying an average annual inflation rate of 2.3 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 276.85. The shekel weakened 0.2 percent to 3.8816 a dollar, trimming this month’s gain to 1 percent.

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