Israel’s Benchmark Bonds Rise as Shekel, Economy Moderate Prices

Israel’s benchmark government bonds rose, pushing the yield to the lowest level in almost two weeks on investor bets a slowing economy and a strong shekel will ease inflationary pressures.

The yield on the 4.25 percent bond due March 2023 dropped six basis points, or 0.06 percentage point, the second-biggest decline among similar-maturity sovereign debt of 23 developed nations tracked by Bloomberg, to 3.96 percent at the close in Tel Aviv. The two-year break-even rate, the yield difference between the inflation-linked bonds and similar-maturity fixed-rate government debt, fell two basis points to 211, implying average annual inflation of 2.11 percent.

Annual inflation may have stayed unchanged at 1.4 percent in December, the lowest since July, according to the median estimate of 13 analysts on Bloomberg. The data will be released at 6:30 p.m. in Jerusalem. The shekel gained 5 percent in the three months ended Dec. 31, the best performer among an expanded list of 31 major currencies tracked by Bloomberg. Economic growth slowed to 3.3 percent in 2012, the Central Bureau of Statistics said Dec. 31, compared with 4.6 percent in the previous year.

“A slowing economy and higher unemployment are expected to continue to moderate consumer prices,” said Rafi Gozlan, chief economist at I.B.I.-Israel Brokerage and Investments Ltd. “In this environment there is a likelihood of another rate cut in coming months which makes long-term government debt still attractive.”

Cheaper Imports

A strong shekel, which is making imports cheaper, is also having a deflationary effect, Gozlan said. The currency weakened 0.2 percent to 3.7310 a dollar at 4:50 p.m. as the U.S. dollar strengthened against 13 of 16 major currencies tracked by Bloomberg. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell three basis points to 1.7 percent, the lowest since Jan. 9.

Slowing growth has eased demand and helped to keep inflation within the government target of 1 percent to 3 percent since September 2011, the longest such period since 2007, leaving room for central bank policy makers to cut interest rates last month to 1.75 percent, the lowest level in two years. The next decision is scheduled for Jan. 28.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, increased 0.1 percent to 281.96.

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