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Israel Benchmark Bonds Fall as Lapid Plans Raising 2013 Deficit

Israeli government bonds dropped, lifting the yield on the debt due March 2023 for the first time in more than a week, as Finance Minister Yair Lapid plans to boost this year’s budget deficit target.

The yield on the 4.25 percent notes rose for the first time since April 24, increasing one basis point, or 0.01 percentage point, to 3.51 percent at the close in Tel Aviv. The rate tumbled a record 39 basis points in April.

Lapid wants to raise the target to 4.9 percent of gross domestic product from 3 percent in the face of a 16 billion-shekel ($4.5 billion) “hole” in the budget as the government’s revenue forecast failed. He is also recommending increasing the limit for 2014 to 3 percent from the planned 2.75 percent.

“The proposal puts into question the government’s ability to meet its fiscal targets and as a result it may need to raise more debt,” said Sagie Poznerson, head of trading at Leader Capital Markets Ltd. in Tel Aviv.

The budget deficit almost tripled in the first quarter to 4.6 billion shekels. Bank of Israel Governor Stanley Fischer has urged the government to cut the gap as it is essential for continuing to reduce the public debt-to-GDP ratio. The ratio fell to 73.2 percent in 2012 from 74.1 percent in 2011, the Finance Ministry said today. The budget deficit almost tripled in the first quarter to 4.6 billion shekels.

Policy Difference

The Finance Minister’s proposal reduces the chances for an interest-rate cut, Alex Zabezhinsky, chief economist at DS Brokerage in Tel Aviv, wrote in an e-mailed report. It represents a “divergence from policy of fiscal responsibility” and won’t enjoy “the support of the Bank of Israel,” he wrote.

The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 to 1.75 percent at the end of March in an effort to shore up the economy amid the European debt crisis. The next rate decision is scheduled for May 27. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose three basis points to 1.59 percent.

The shekel appreciated 0.2 percent to 3.5682 a dollar at 4:40 p.m. in Tel Aviv, bringing its gain for the year to 4.6 percent. The currency is the second-best performer in 2013 after the Mexican peso among 31 major currencies tracked by Bloomberg. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose for a sixth day, adding 0.1 percent to 289.61.

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