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Israel Bonds Post Biggest Weekly Gain in Month After Rate Cut

Dec. 27 (Bloomberg) -- Israel’s benchmark bonds rallied, posting the biggest weekly drop in yields in a month after the central bank cut interest rates to the lowest level in more than two years to spur economic growth.

The yield on the 5.5 percent Mimshal Shiklit notes due in January 2022 dropped 10 basis points, or 0.10 percentage point, this week, matching the decline in the week that ended Nov. 29, according to data compiled by Bloomberg. The yield added three basis points to 3.66 percent, at the 4:30 p.m. close in Tel Aviv. The shekel strengthened 0.4 percent to 3.7202 a dollar.

The Bank of Israel cut the benchmark interest rate by a quarter percentage point to 1.75 percent this week to boost the economy, which it estimates may grow 3.3 percent this year from 4.6 percent in 2011. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell four basis points to 1.65 percent, the lowest since July 2009.

“Interest rates are likely to stay low for an extended period as the economy slows and inflation moderates,” said Yshai Shilo, a fixed-income broker at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv. “In this environment investors seeking a higher yield have been buying longer-term government bonds versus shorter-term bonds.”

The benchmark bonds rose 6.5 percent this year compared with a gain of 8.9 percent in the Tel-Bond 40 index. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government debt of similar maturity, slumped 10 basis points to 209, implying an average annual inflation rate of 2.09 percent.

Inflation slowed to 1.4 percent in November, the lowest since July. The government’s price-rise target is 1 percent to 3 percent.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Alaa Shahine at asalha@bloomberg.net

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