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Israel Short-Term Bonds Fall on Bets Rate-Cut Policy Ending

March 27 (Bloomberg) -- Israeli short-term government bonds fell, pushing the yield on the 2016 notes up the most in more than two weeks, on bets the central bank will hold rates for the rest of the year. The shekel weakened.

The yield on the 4.25 percent government notes due August 2016 jumped four basis points, the most since March 10, to 2.29 percent, at the early close in Tel Aviv. The yield on the 4.25 percent benchmark bond due March 2023 fell four basis points, or 0.04 percentage point, to 3.91 percent. The shekel depreciated for the first time since March 18, declining 0.4 percent to 3.6396 a dollar at 2:46 p.m. in Israel.

The Bank of Israel monetary policy panel on March 24 held the benchmark rate at 1.75 percent for a third month. Sixteen of the 21 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter-point cut. That day the regulator’s research department forecast the rate would remain unchanged this year and could reach 2.50 percent at the end of 2014. Israeli markets were closed March 25 and 26.

“Those who thought the bank would cut rates are now selling in favor of 10-year bonds,” Sagie Poznerson, head of trading at Leader Capital Markets Ltd. in Tel Aviv, said by phone today. “Together with the outlook from the research department, it doesn’t look like there will be any change for a while.”

Next Governor

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 1.64 percent. The measure climbed six basis points to 1.65 percent on March 25. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose 0.2 percent to 285.03.

The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, rose four basis points to 265. That implies an average annual inflation rate of 2.65 percent.

Governor Stanley Fischer will leave his post on June 30. A replacement has yet to be named. “People assume the next governor will not be as active as Fischer has been in rate decisions,” Poznerson said.

To contact the reporter on this story: Robert Lakin in Tel Aviv at rlakin1@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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