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Israel Yield Drops to Record as Slower Inflation Spurs Rate Bets

Israeli benchmark bonds gained, pushing the yield to a record low, after a report showed inflation slowed, spurring bets the central bank may lower interest rates as early as next week to support the economy.

The yield on the 5.5 percent Mimshal Shiklit securities due in January 2022 dropped six basis points, or 0.06 percentage point, to 3.7 percent at the close in Tel Aviv, the lowest since the notes started trading in April 2011. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell for the first time in four days on Dec. 14, dropping two basis points to 1.78 percent.

Inflation slowed to 1.4 percent in November, the Central Bureau of Statistics said Dec. 14, below the 1.8 percent median estimate of 12 analysts surveyed by Bloomberg. The Bank of Israel kept interest rates at 2 percent last month after October’s surprise cut. Economic growth may slow to 3.3 percent this year from 4.6 percent in 2011, central bank estimates show.

“The surprise drop in consumer prices points to further moderation of inflationary pressure as economic growth slows,” said Modi Shafrir, chief economist at Tel Aviv-based at I.L.S. Brokers Ltd. “We now forecast a chance of more than 50 percent for interest rates to be cut at the end of the month, which is positive for government bonds.”

Buying Bonds

The central bank is scheduled to review interest rates on Dec. 24. I.L.S. Brokers recommends shortening the duration of government bonds to around five years to take advantage of the recent decline in longer-term debt. The benchmark bond yield has plunged 15 basis points this month. The yield on the 4 percent bonds maturing in January 2018 fell eight basis points today to 2.74 percent.

The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, rose seven basis points to 211. That implies an average annual inflation rate of 2.11 percent, within the government’s 1 percent to 3 percent target range.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, declined for a third day, retreating 0.2 percent to 280.20. Local funds raised a net 946 million shekels ($250 million) in the week ended Dec. 13 compared with 1.2 billion shekels in previous week, Meitav Investment House Ltd. reported today. Corporate-bond funds pulled in 330 million shekels compared with 483 million shekels a week earlier.

The shekel was little changed at 3.7900 a dollar on Dec. 14. The currency has strengthened 0.7 percent so far this month.

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