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Israel Benchmark Bonds Fall Most in 7 Weeks on U.S. Budget Deal

Jan. 1 (Bloomberg) -- Israel’s 2022 government bonds fell, lifting the yield up the most in seven weeks, and stocks rallied as investors sought riskier assets after the U.S. Senate passed a budget deal to avert the so-called fiscal cliff.

The yield on 5.5 percent benchmark government bonds due in 2022 soared six basis points, or 0.06 percentage point, matching the gain on Nov. 14, to 3.67 percent at the close in Tel Aviv. The benchmark TA-25 Index of stocks rose 2.5 percent, the most since March 14. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, gained 0.4 percent to 282.32, the highest on record. .

The MSCI All-Country World Index yesterday rose the most in two weeks and Treasuries fell for the first time in four days as the U.S. Senate reached an after-deadline deal to avert the potential economic harm of $600 billion in spending cuts and tax increases. Exports account for about 40 percent of Israel’s economic output and the U.S. is one of its largest markets.

“The initial agreement removes some uncertainty in the market about plans in the short-term but a more long-term U.S. debt reduction plan is needed moving forward,” said Ayelet Nir, chief economist and strategist at Psagot Investment House Ltd. “The initial move is also positive for Israeli markets as the country’s economic growth is driven by exports.”

Cuts Delayed

The Senate bill, passed 89-8, would make permanent the tax cuts for most households that expired at midnight, continue expanded unemployment benefits and delay automatic spending cuts for two months. The Bank of Israel, led by Governor Stanley Fischer, cut its benchmark interest rate last month to the lowest level in more than two years to boost economic growth, which it estimates may have slowed to 3.3 percent in 2012 from 4.6 percent in the previous year.

One-year interest-rate swaps, an indicator of investor expectations for borrowing costs over the period, declined 2 basis points to 1.63 percent, the lowest since July 2009. The shekel strengthened 0.2 percent to 3.7271 per dollar. The currency climbed 2.2 percent last month, the sixth-best performer among an expanded list of 31 major currencies tracked by Bloomberg.

The two-year break-even rate, the difference between yields on inflation-linked bonds and fixed-rate government notes of similar maturity, retreated four basis points to 199 basis points, implying an average annual inflation rate of 1.99 percent over the period. The government’s price target range is between 1 percent and 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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