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Israel Bond Rises to Record on Rate Cut Bets and Shekel Gains

Israel’s government bonds rose, pushing the yield down to a record, as inflation slowed and a surprise interest reduction spurred bets the central bank could follow with another rate cut.

The yield on the 4.25 percent notes due in March 2023 fell four basis points, or 0.04 percentage point, to 3.47 percent at the close in Tel Aviv. The shekel rebounded from the biggest five-day slump since September 2011, rising 0.6 percent to 3.6370 a dollar at 5:10 p.m. Bank of Israel Governor Stanley Fischer cut interest rates on May 13, and announced a program to buy foreign currency to curb the shekel’s appreciation.

“Fischer’s move shows that the central bank is determined to fight shekel appreciation, increasing the likelihood for more rate cuts in coming months,” Yshai Shilo, a fixed-income broker at I.B.I.-Israel Brokerage & Investments Ltd., said by phone from Tel Aviv. “The low inflation data also supports a quarter-point rate cut as early as the end of the month.”

The currency has strengthened 9 percent in the past six months, making it the best performer among 31 major currencies tracked by Bloomberg. April. To tame the shekel rally and bolster exports, which make up 40 percent of Israel’s economic output, the Bank of Israel cut interest rates by a quarter-point to 1.5 percent in an unscheduled decision this week.

Expanding Economy

Annual inflation slowed to 0.8 percent last month, falling below the government’s 1 percent to 3 percent target for the first time since July 2007, the statistics bureau said May 14. That matched the median estimate of 14 analysts on Bloomberg. The central bank will lower rates to 1.25 percent at its next rate decision meeting on May 27, according to two of six analysts in a Bloomberg survey. The remainder expect no change.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 1.30 percent, taking this week’s decline to 25 basis points. Fischer, who will step down in June, has gradually cut interest rates from 3.25 percent in 2011 to boost the economy amid the European debt crisis.

The economy expanded an annualized 2.8 percent in the first quarter from 2.6 percent in the previous quarter, the statistics bureau said today. The median estimate of 10 economists surveyed by Bloomberg was for growth of 2.8 percent.

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