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Bond Investors Shun Israeli Government for Companies on Outlook

Israel’s six-year government bond yield posted its first weekly increase in more than a month as demand for riskier corporate notes grew after the government raised its 2013 economic growth outlook.

The yield on the 6 percent notes due February 2019 rose two basis points, or 0.02 percentage point, this week, the first gain since the week ended Nov. 15, data compiled by Bloomberg show. It fell four basis points to 3.07 percent at the close in Tel Aviv. The shekel strengthened as much as 0.3 percent to 3.7412 a dollar, the highest intraday level since April 30, before trading at 3.7472 to the dollar at 4:42 p.m. in Tel Aviv.

Gazit-Globe Ltd., Israel’s largest real estate company, last week doubled to 1 billion shekels ($267 million) the size of a bond sale to meet investor demand. First International Bank of Israel Ltd. yesterday received bids from institutions of more than twice the 400 million shekels it’s seeking in a sale of deferred notes. The Finance Ministry on Dec. 16 raised its 2013 growth forecast to 3.5 percent from 3 percent.

“Investors are switching to riskier assets, selling government bonds this week as companies are coming to the market to sell debt after a dry period,” said Sagie Poznerson, head of trading at Leader Capital Markets Ltd. in Tel Aviv. “Corporate debt issues are providing a sound alternative for investors also as interest rates are expected to remain low.”

The Bank of Israel has gradually reduced the main borrowing rate from 3.25 percent in August 2011 to 2 percent in an effort to shore up the economy. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, declined less than one basis point to 1.74 percent, taking this week’s drop to four basis points.

Higher Growth

HSBC Holdings Plc today raised its 2013 growth forecast for the Israeli economy to 2.8 percent from 2.6 percent, with the rate expected to pick up to 3.4 percent in 2014. Israel posted a current account surplus in the third quarter, its first in a year, as imports fell, statistics bureau data showed Dec. 16.

The yield on the 5.5 percent benchmark government notes due January 2022 fell three basis points to 3.76 percent and was unchanged for the week after declining for four consecutive weeks. The shekel is up 1.8 percent this month. The dollar’s 14-day relative-strength index against the Israeli currency fell to 29, indicating to some investors that it’s poised to reverse losses.

The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, rose two basis points to 214, implying an average annual inflation rate of 2.14 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 279.25. The index reached a record high Dec. 11.

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