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Israel Benchmark Bonds Fall as Fischer Cautions on Budget Woes

Israel’s benchmark government bonds fell, lifting the yield up the most in more than two weeks, after Bank of Israel Governor Stanley Fischer cautioned the country may struggle to reduce its budget deficit.

The yield on the 4.25 percent securities maturing March 2023 rallied five basis points, or 0.05 percentage point, the most since Jan. 29, to 4.11 percent at the close in Tel Aviv. The yield on the 5.5 percent notes due Jan. 2022 rose six basis points to 3.87 percent.

Israel has significant longer-term economic issues, including the budget, Fischer said in Jerusalem today. This year’s budget deficit may be 3.6 percent of gross domestic product, above a 3 percent target, according to central bank projections. Expenditures, which may rise 9 percent in 2013, must be curbed along with an “increase in tax rates or cancellation of exemptions” to avoid a deficit of 4.9 percent of GDP, it said today.

“Fischer as the adviser to the government is cautioning the government to take the necessary steps to contain a widening deficit,” said Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv. “The comments come at a critical time of coalition building when parties also put forward their budgetary demands.”

Prime Minister Benjamin Netanyahu is forming a coalition government with Yair Lapid, the leader of the centrist second-place finisher in last month’s elections. Netanyahu, who raised taxes last year to boost revenue, called early elections after failing to reach an agreement with coalition parties on spending cuts.

Slower Growth

Economic growth slowed to 3.3 percent last year from 4.6 percent in 2011, according to the Central Bureau of Statistics. The country’s trade deficit widened to $1.48 billion in January from $1.24 billion a month earlier, the statistics bureau said today. To spur economic growth, the central bank cut the key interest rate by 1.5 percentage points since September 2011 to 1.75 percent.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, advanced two basis points to 1.74 percent. The shekel strengthened 0.3 percent to 3.68 a dollar. The currency, which rose to a 15-month high against the dollar on Feb. 1, has gained 0.6 percent this month, the fifth-best performer among an expanded list of 31 major currencies tracked by Bloomberg.

More Money

“The exchange rate has been appreciating as other countries made their monetary policies more and more expansionary and more money started coming into Israel to take advantage of the small differential in interest rates,” Fischer said. The shekel is being supported by quantitative easing in U.S., Europe and Japan, the Bank of Israel said in minutes of its last rate-setting meeting.

Annual inflation, which unexpectedly accelerated to 1.6 percent in December from 1.4 percent a month earlier, may average 2.12 percent in the next two years, according to the two-year break-even rate. The rate, which reflects the yield difference between the inflation-linked bonds and similar-maturity fixed-rate government debt, rose less than one basis point to 212.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, fell for a third day, retreating 0.2 percent to 282.82.

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