Israel Benchmark Yield Drops as Steady Prices Boost Rate-Cut Bet

Israel’s government bonds gained, pushing the yield down the most in almost two weeks, on speculation of an interest-rate cut this month as the country’s February inflation rate was unchanged.

The yield on the 4.25 percent securities due in March 2023 fell four basis points, the biggest decline since March 4, to 4.01 percent at the close in Tel Aviv. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped four basis points, 0.04 percentage point, on March 15 to 1.61 percent.

Annual inflation remained at 1.5 percent in February, the statistics bureau said March 15, matching the median estimate of 14 analysts surveyed by Bloomberg. The Bank of Israel, which kept interest rates at 1.75 percent last month, is likely to lower its base lending rate to 1.5 percent on March 24, according to nine of 17 analysts in a Bloomberg survey.

“Inflation remained in the low range supporting expectations that the central bank will lower interest rates this month to boost economic growth,” said Avihay Hermon, a bond trader at Israel Discount Bank Ltd. in Tel Aviv. “The market is increasingly pricing in a quarter-point rate-cut.”

Economic growth eased to 3.1 percent in 2012 from 4.6 percent the previous year, the statistics bureau said March 10. Excluding first-time natural-gas revenue, growth is expected to shrink further in 2013, according to the central bank.

Inflation Unchanged

Economists’ expectations for 12-month inflation have been steady at an average 1.9 percent since November, according to a central bank survey. The government’s target range is 1 percent to 3 percent. Average annual inflation expectations rose less than one basis point 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 Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, fell 0.1 percent to 283.90. Local funds raised 68 percent less last week, the weakest week since December 2012, Meitav Investment House Ltd. said in an e-mailed report today. Corporate-bond funds pulled in 104 million shekels compared with 506 million shekels, it said.

Israeli Prime Minister Benjamin Netanyahu yesterday informed President Shimon Peres he signed coalition deals that give him the majority to form a new government. The shekel strengthened 0.3 percent to 3.6832 a dollar on March 15. The currency has gained 0.8 percent this month, according to data compiled by Bloomberg.