Israel Benchmark Yield Soars to 4-Week High on Deficit Concern

Israeli benchmark government bonds fell, lifting the yield to the highest in almost four weeks, on bets a new government may struggle to meet the deficit target.

The yield on the 4.25 percent benchmark securities maturing March 2023 rose two basis points, or 0.02 percentage point, to 4.05 percent, matching the level on Feb. 18, at the close in Tel Aviv. The yield increased 12 basis points this week, the biggest gain since the week ended Jan. 31.

Israeli Prime Minister Benjamin Netanyahu today reached agreement on a coalition to form a new government that will need to make spending cuts necessary to pass the 2013 budget. Netanyahu called for early elections last year after his coalition partners refused to approve 14 billion shekels ($3.8 billion) in cuts to meet a deficit target of 3 percent of economic output.

“Now that a new government will be formed it still needs to be seen if it can execute and will be able to keep the deficit in check,” said Alex Zabezhinsky, chief economist at Tel Aviv-based DS Securities & Investments Ltd. “The uncertainty of the risk is reducing demand for long-term debt.”

The first thing the government will have to handle is to pass a budget that will protect the Israeli economy, Netanyahu said today. Israel’s budget “isn’t simple” as “billions” must be cut, which will present a challenge for the next minister, said outgoing Finance Minister Yuval Steinitz at a Knesset panel on March 11. The government will have to trim spending and raise taxes to meet the targets for 2013 and 2014, according to the minutes of the Bank of Israel’s monetary committee released on March 11.

Inflation Expectations

Annual inflation, which decelerated to 1.5 percent in January may be unchanged in February when data is released tomorrow, according to the median estimate of 14 analysts compiled by Bloomberg. Average annual inflation expectations rose two basis points to 252, according to the two-year break-even rate, the yield difference between the inflation-linked bonds and fixed-rate government notes of similar maturity. The government’s target range is between 1 percent and 3 percent.

Israel’s seasonally adjusted surplus was $71 million in the fourth quarter, down from a revised $224 million in the July-September period, the Central Bureau of Statistics said today. For the year, the country posted a deficit of $199 million, compared with a revised surplus of $3.4 billion in 2011 and $8.1 billion in 2010.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, gained three basis points to 1.65 percent. The Bank of Israel last month left interest rates unchanged at 1.75 percent.

The Tel-Bond 40 Index of corporate bonds rose for the first time since March 7, increasing 0.1 percent to 284.19. The shekel was little changed at 3.6963 a dollar at 4:44 p.m. in Tel Aviv. The currency advanced to 0.5 percent so far this month, the fifth-best performer among a list of 31 major currencies tracked by Bloomberg.

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