Israel Benchmark Yield Drops to 2-Week Low on Deficit Risk Bets

Israeli benchmark government bonds rose, pushing the yield to the lowest level in more than two weeks, on bets Finance Minister Yair Lapid will take steps to meet the deficit target.

The yield on the 4.25 percent benchmark notes due March 2023 fell five basis points, or 0.05 percentage point, to 3.95 percent, the lowest since March 7, at the close in Tel Aviv. The shekel strengthened to a 17-month high, gaining 0.3 percent to 3.6550 a dollar on March 22, as Israel renewed diplomatic ties with Turkey. Israeli markets will be closed until March 27 for the Passover holiday.

Lapid, who was last week sworn in, wrote on his Facebook page, that cuts will have to be made “where it hurts” to deal with overspending. Prime Minister Benjamin Netanyahu called for early elections last year after his coalition partners refused to approve 14 billion shekels ($3.8 billion) in budget cuts to meet a deficit target of 3 percent of economic output. The central bank will at 5:30 p.m. announce the benchmark rate for the next two months.

“Lapid’s comments point to a fiscally responsible policy going forward which will include making necessary cuts,” said Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv. “Reduced risk to the deficit is pushing government yields down.”

The country last year posted a current-account deficit of $199 million, compared with a revised surplus of $3.4 billion in 2011 and $8.1 billion in 2010, the Central Bureau of Statistics said March 14. The shekel strengthened as Netanyahu and his Turkish counterpart Recep Tayyip Erdogan agreed to normalize ties and reinstate ambassadors. The currency rose 1.6 percent this month, the third-best performer among 31 major currencies tracked by Bloomberg.

Rate Decision

The Bank of Israel, which has gradually cut its borrowing rate to 1.75 percent from 3.25 percent in 2011 to boost economic growth, will probably leave the rate steady at today’s Monetary Policy Committee meeting, according to 16 out of 21 analysts in a Bloomberg survey. The remainder forecast a quarter-point cut to 1.5 percent. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell less than one basis point to 1.59 percent on March 22.

“We may see the central bank save its ammunition this time and cut the lending rate in coming months to stem the shekel rally,” said Kahanovich.

Economic surveys indicate an “improvement in expectations of economic activity in the business sector” and the most-recent monthly indicators show a possibility that there was some improvement in January activity, according to the central bank minutes of the last rate decision on March 11. The country’s unemployment rate rose to 6.7 percent in February from 6.5 percent a month earlier, the statistics bureau said today.

Fund Flows

Israel’s annual inflation rate remained at 1.5 percent in February from the previous month, the statistics bureau said March 15. The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, was increased less than one basis point to 261. That implies an average annual inflation rate of 2.61 percent.

Local funds raised 68 percent less last week, Meitav Investment House Ltd. said in an e-mailed report today. Corporate-bond funds pulled in 33 million shekels compared with 104 million shekels, it said. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.2 percent to 284.58.

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