Israel 2023 Benchmark Bond Yield Jumps After S&P Rating, Syria

Israeli government bonds fell, lifting the yield on the benchmark 10-year debt the most in almost nine months, after Standard & Poor’s cut the country’s rating and amid reports Israel attacked targets in Syria.

The yield on the 4.25 percent notes due March 2023 rose 11 basis points, or 0.11 percentage point, the most since August 13, to 3.62 percent at the close in Tel Aviv. The rate tumbled a record 39 basis points in April. The benchmark TA-25 Index of stocks fell 0.1 percent.

Standard & Poor’s late on May 2 cut the country’s currency rating to A+/A-1 from AA-/A-1+ citing “recent fiscal slippage” and a 2013 budget deficit larger than last year’s. The Israeli Cabinet today agreed to raise the 2013 deficit target to 4.65 percent of gross domestic product from a planned 3 percent and to increase the limit for 2014 to 3 percent from the planned 2.75 percent.

“The big diversion from the target is rightly raising concern about fiscal responsibility also from foreign rating agencies,” Moshik Yaniv, the head of the local fixed-income desk at Migdal Capital Markets Ltd. in Tel Aviv, said by phone. “The proposal puts into question the new government’s ability to meet its fiscal targets by making the necessary budget cuts.”

The S&P downgrade came hours after Finance Minister Yair Lapid’s initial proposal to raise the deficit to 4.9 percent was reported. He backpedaled following the downgrade and criticism from analysts. The government is facing a 16 billion-shekel ($4.5 billion) “hole” in the budget as its revenue forecast failed, Lapid said May 1.

Tough Task

Fitch Ratings Ltd., which on April 25 affirmed Israel’s A rating, said last week the proposed deficit is above forecast and will make it tougher for the government to reduce the debt-to-GDP ratio. The ratio fell to 73.2 percent in 2012 from 74.1 percent in 2011, the Finance Ministry said May 1.

Bank of Israel Governor Stanley Fischer has urged the government to cut the gap as it is essential for continuing to reduce the public debt-to-GDP ratio. The budget deficit almost tripled in the first quarter to 4.6 billion shekels.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, dropped for the first time since April 24, retreating 0.4 percent to 288.53. The shekel strengthened for a 12th day on May 3, adding 0.4 percent to 3.5549 per dollar and capping the longest stretch of daily gains since at least April 1981, when Bloomberg started compiling data.

Prime Minister Benjamin Netanyahu called early elections in October after concluding he would not win government approval for the budget cuts necessary to reach the 3 percent deficit target. Parliament has less than three months to approve the spending plan.

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