Israel’s 5-Year CPI Bonds Jump After Unexpected Inflation Pickup

Israel’s consumer price-linked government bonds due 2017 rose, pushing the yield to the lowest level in a week, on bets an unexpected acceleration in inflation may signal greater price pressures.

The yield on the 1 percent securities dropped three basis points, or 0.03 percentage point, to 0.19 percent at the close in Tel Aviv, the lowest since Jan. 9. The two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government bonds of similar maturity, soared 14 basis points to 212, implying an average annual inflation rate of 2.12 percent over the period.

Annual inflation was 1.6 percent last month, Central Bureau of Statistics data showed yesterday, surpassing the 1.4 percent median estimate of 13 economists surveyed by Bloomberg. The rate accelerated from 1.4 percent in November and falls within the government’s target range of 1 percent to 3 percent.

“Rental prices and food costs rose more than expected and we may see this trend continue in the first half of this year,” said Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv. “The expectations are providing support for shorter-term inflation-linked government bonds and are reducing the likelihood that the central bank will cut interest rates.”

The Bank of Israel lowered the base lending rate by a quarter-point to 1.75 percent in December, the second reduction in three months, as the regulator seeks to spur economic growth. The nation’s economy expanded 3.3 percent in 2012, down from 4.6 percent a year earlier, the statistics bureau’s preliminary data showed Dec. 31.

Inflation Outlook

The economy grew 2.9 percent in the third quarter, up from a previous estimate of 2.8 percent, the statistics bureau said today. Economists’ 12-month inflation expectations had fallen to 1.8 percent, on average, in December from 1.9 percent a month earlier, the central bank said on Dec. 18.

The yield on the nation’s benchmark 4.25 percent government bonds advanced for the first time since Jan. 10, adding one basis point to 3.97 percent. The rate rose 12 basis points this month. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, increased for the first time in four days, rising two basis points to 1.71 percent today.

The Tel-Bond 40 Index of corporate bonds was up for a second day, increasing 0.1 percent to 282.10. The shekel was little changed at 3.7255 a dollar at 4:39 p.m. The currency gained 0.2 percent this month.

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