Israel Bonds Rally as Shekel Gains, U.S. Economy Fuel Rate Bets

Israeli benchmark government bonds rose, with yields falling the most since June, as the Federal Reserve maintained its debt buying and the shekel near a two-year high stoked bets the central bank will cut rates tomorrow.

“We give a 30 to 40 percent chance that the central bank will lower rates as early as tomorrow’s meeting,” said Sagie Poznerson, head of trading at Leader Capital Markets in Tel Aviv. “Inflation, which is expected to remain within target range, is also providing room for the bank to cut rates.”

The yield on the 4.25 percent notes due in March 2023 tumbled 12 basis points, or 0.12 percentage point, the most since June 16, to 3.84 percent, at the close in Tel Aviv. The shekel has rallied 6.3 percent this year, the most among 31 major currencies tracked by Bloomberg. It settled at 3.5122 a dollar last week after strengthening to the highest since August 2011 on Sept. 18.

Consumer prices are expected to rise 1.9 percent in the coming 12 months, within the government’s target range of 1 percent to 3 percent, the central bank said last week. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped eight basis points to 1.19 percent on Sept. 20. Poznerson’s rate-cut bets contrast with forecasts of no change in the benchmark interest rate, according to 19 of 20 analysts surveyed by Bloomberg.

“With growth remaining reasonably resilient and home prices rising, we think the Bank of Israel is reluctant to cut further,” Daniel Hewitt, a London-based economist at Barclays Plc, wrote in an e-mailed report today. “However, decisions are data dependent and further cuts cannot be ruled out in the next two quarters.”

Growth Estimates

Treasury yields on Sept. 18 posted the biggest decline in almost two years after the Fed said policy makers would await evidence of sustained growth before tapering bond purchases.

Israel’s bond market had been closed since Sept. 17 for the Sukkot holiday. Trading is shortened today through Sept. 24 for the intermediate days of the festival.

The nation’s economy will probably expand 3.4 percent this year, the statistics bureau said Sept. 16 in its first estimate of 2013 growth. The central bank in June forecast 3.8 percent. The Bank of Israel has held its key interest rate at 1.25 percent since reducing it by 50 basis points in May to weaken the currency and support the economy.

Annual inflation slowed to 1.3 percent in August, data from the Central Bureau of Statistics showed Sept. 15, below the 1.6 percent median estimate of eight analysts in a Bloomberg survey.

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