Israel 2016 Yield Drops on Bets Slower Growth to Spur Rate Cuts

Israel’s 2016 government bonds rose, pushing the yield to lowest level in almost a month, on bets slower economic growth will prompt the Bank of Israel to cut interest rates in the coming months.

The yield on the 2.5 percent notes due May 2016 dropped five basis points, or 0.05 percentage point, to 1.66 percent, the lowest since June 19, at the close in Tel Aviv. The yield on the government’s benchmark 4.25 percent bond maturing in March 2023 declined three basis points to 3.76 percent. The Israeli market is closed tomorrow for a holiday.

Demand for the 2016 securities increased at a government debt sale today, with investors seeking 7.2 times the 200 million shekels ($56 million), up from 3.6 times at a similar auction on July 1. Economic data in June point to a “further slowdown” in economic growth, the central bank, which kept its benchmark rate at 1.25 percent last month, said on July 8. Israel’s purchasing managers index contracted in June for a second month to 46, Bank Hapoalim said today.

“More data are pointing to a slowing economy, which today pushed demand for non-linked government bonds at the auction,” Shuki Arditi, a bond trader at Tel Aviv-based Leader Capital Markets Ltd., said by phone. Expectations that June’s inflation rate may be lower than forecast also contributed to “raising the likelihood that the central bank will cut rates as early as the end of this month,” Arditi said.

Rate Cuts

Economic growth will probably slow to 3.2 percent in 2014 from 3.8 percent this year, the Bank of Israel said last month. Annual inflation probably accelerated to 1.9 percent in June from 0.9 percent a month earlier, the median estimate of 10 analysts surveyed by Bloomberg shows. The Central Bureau of Statistics will release the data at 6:30 p.m. local time.

June inflation was linked to some one-time increases after the government raised taxes, according to Alex Zabezhinsky, chief economist at Meitav DS Investments Ltd. in Tel Aviv. Israel last month increased the value-added tax to 18 percent from 17 percent amid steps by Prime Minister Benjamin Netanyahu’s government to lower the budget deficit.

“Looking ahead, inflation won’t be an issue and is expected to moderate as the economy slows leaving room for more rate cuts,” Zabezhinsky said.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, declined one basis points to 1.17 percent. The shekel strengthened 0.3 percent to

3.5905 a dollar at 5:27 p.m. in Tel Aviv, taking this year’s gain to 4 percent, the best performer among 31 major currencies tracked by Bloomberg.

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