Israel Benchmark Bonds Fall Most in 3 Weeks on Deficit Concern

Israel’s benchmark government bonds fell, lifting the yield up the most in more than three weeks, as a decline in government tax receipts increased bets the country may struggle to meet its budget deficit target.

The yield on the 4.25 percent securities maturing March 2023 rose two basis points, or 0.02 percentage point, the biggest increase since Feb. 13, to 3.93 percent at the close in Tel Aviv. The yield on the 5.5 percent notes due Jan. 2022 gained two basis points to 3.70 percent.

Israel posted a 4.3 billion-shekel ($1.16 billion) budget deficit in February in part due to “unusually large” tax refunds, the Finance Ministry said today, after a surplus of 2.6 billion shekels in January. Receipts declined 4.8 percent in real terms from last February as slowing global growth moderated the expansion of the export-dependent economy. The government is targeting a deficit equivalent to 3 percent of economic output.

“The deficit in February is mainly due a decline in tax income as tax refunds were much higher than expected and also as expenditure rose,” said Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers, said by phone. “As a result it will be very difficult for the government to meet its budget deficit target for 2013 without raising taxes.”

Refunds Triple

The government refunded 2.2 billion shekels last month, more than triple the amount returned in February 2012, the ministry said. This year’s budget deficit may be 3.6 percent of gross domestic product, according to central bank projections.

Israel must cut 14 billion shekels from its budget, Finance Minister Yuval Steinitz said in January. The deficit last year reached 4.2 percent of GDP. Economic growth slowed to 3.3 percent last year from 4.6 percent in 2011, prompting the central bank to cut interest rates.

The shekel strengthened 0.7 percent to 3.7076 a dollar at 4:42 p.m. in Tel Aviv, the ninth-best performer among an expanded list 31 major currencies tracked by Bloomberg. The currency rose 0.3 percent this month. Israel’s foreign currency reserves declined to $77.3 billion in February from $78.4 billion last month, mostly due to a revaluation of $826 million, the Bank of Israel said today.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, increased for a fifth day, advancing 0.1 percent to 285.49. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, advanced two basis points to 1.62 percent.

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