Israel Bonds Rise as Slower Inflation Leaves Room for Rate Cut

Israeli 2016 government bonds gained, pushing the yield down the most in almost two months, as economic growth and inflation slowed, spurring bets the central bank may cut interest rates in coming months.

The yield on the 2.5 percent notes due May 2016 fell four basis points, or 0.04 percentage point, matching the decline on Dec. 25, to 2.28 percent at the close in Tel Aviv. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points on Feb. 15 to 1.69 percent, the lowest since Jan. 9.

The economy expanded an annualized 2.5 percent in the fourth quarter, the slowest pace in more than three years, the Central Bureau of Statistics said today. Annual inflation slowed to 1.5 percent in January, the statistics bureau said Feb. 15, below the 1.6 percent median estimate of 11 analysts surveyed by Bloomberg. The Bank of Israel kept interest rates at 1.75 percent last month, its lowest in more than two years, after a surprise cut in December.

“The surprise drop in consumer prices points to further moderation in economic growth,” said Alex Zabezhinsky, chief economist at DS Securities & Investments in Tel Aviv. “Inflation at the mid-point of the central bank’s target range is not much of a threat and may leave room for another rate cut in coming months.”

Bank of Israel Governor Stanley Fischer said in a Feb. 13 press briefing that Israel doesn’t “have an inflation problem at the moment.” The government’s target range is 1 percent to 3 percent. The central bank’s next interest rate-setting meeting is on Feb. 25.

Inflation Expectations

The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, advanced three basis point to 215. That implies an average annual inflation rate of 2.15 percent. Economists’ 12-month inflation expectations rose to 2 percent on average from 1.9 percent the previous month, the central bank said last month.

The yield on the 4.25 percent benchmark securities due in March 2023 fell for a second day, retreating two basis points to 4.07 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 282.93. Israeli funds raised a net 700 million shekels ($190 million) last week, Meitav Investment House Ltd. reported today. Corporate-bond funds pulled in 552 million shekels compared with 473 million shekels a week earlier, it said.

The shekel weakened 0.2 percent to 3.6904 a dollar on Feb. 15. The currency has strengthened 0.5 percent so far this month, according to data compiled by Bloomberg.

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