Israel CPI Bond Yield Rises Most in 3 Weeks as Inflation Eases

Yields on Israeli consumer-price linked bonds rose the most in three weeks after inflation eased more than economists expected.

The yield on the 3.5 percent notes maturing in April 2018 climbed four basis points, matching the gain on March 28, to 0.20 percent, at the close in Tel Aviv. The government’s 4.25 percent benchmark bonds due March 2023 yielded 3.71 percent, down five basis points, the lowest since the notes started trading in August.

The CPI-linked notes, which gained in the past four weeks, fell after the statistics bureau said April 15 that inflation slowed to a nine-month low of 1.3 percent in March, below the 1.4 percent median estimate of 13 economists surveyed by Bloomberg. Israel’s economy has suffered partly due to the debt crisis in Europe, one of its key export markets. Growth may slow to 2.8 percent this year from 3.2 percent in 2012, excluding debut natural-gas revenues, according to the central bank.

“The lower-than-forecast drop in consumer prices points to further easing of inflationary pressure as economic growth slows,” said Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd. “On the back of moderate inflation and the recent appreciation of the shekel, we expect an interest rate reduction in coming months.”

The Bank of Israel kept interest rates at 1.75 percent in March, the lowest in almost three years. The regulator is due to hold its next rate-setting meeting on May 27. One-year interest rate swaps fell to 1.62 percent today from 1.63 percent at the end of March.

Weaker Shekel

Israel’s trade deficit widened to $1.08 billion in March from $954 million a month earlier, the Central Bureau of Statistics reported today. It also revised upward its fourth-quarter annualized economic growth figure to 2.6 percent from 2.4 percent.

Looking to stem the shekel’s rally to a near 18-month high, the central bank on April 8 bought dollars for the first time in almost two years. The currency depreciated 0.3 percent to 3.6276 a dollar at 4:57 p.m. in Tel Aviv, trimming this year’s advance to 2.9 percent, the third-best performer among 31 major currencies tracked by Bloomberg.

The one-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government debt of similar maturity, slumped 33 basis points to 231. That implies an average annual inflation rate of 2.31 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, rose for a third day.

Before it's here, it's on the Bloomberg Terminal.