Israel 2023 Benchmark Yield Drops to 6-Week Low After Rate Cut

Israeli benchmark government bonds rose for the third day, pushing yields to a six-week low, after the Bank of Israel unexpectedly lowered borrowing costs to boost the nation’s export-driven economy.

The yield on the 4.25 percent notes due in March 2023 dropped three basis points, or 0.03 percentage point, to 3.77 percent, the lowest level since Aug. 14, at the close in Tel Aviv. One-year interest rate swaps, an indicator of investor expectations for rates over the period, retreated two basis points to 1.05 percent.

Bank of Israel, led by acting Governor Karnit Flug since Stanley Fischer left three months ago, yesterday cut its base lending rate by a quarter of a percentage point to 1 percent, the lowest in almost four years. Only one of the 18 economists surveyed by Bloomberg predicted the change. The bank said the gaining shekel and a stagnation in exports, the main engine of growth in the past decade, triggered the decision. Exports will probably drop 1.1 percent in 2013, the bank’s forecasts show.

“The central bank sent a clear message that the strong shekel and exports are a concern for the economy,” Yshai Shilo, a fixed-income broker at Tel Aviv-based I.B.I.-Israel Brokerage & Investments, said by phone. “We don’t expect another rate cut this year, but we could see further easing in the next six months if there is a deterioration in economic data.”

Appreciation Trend

The shekel on Sept. 18 strengthened to the highest since August 2011 after the U.S. Federal Reserve said it would refrain from reducing the $85 billion pace of monthly bond buying, as it needs to see more signs of a lasting improvement in the economy. The currency weakened today, trimming this year’s appreciation to 5.7 percent, the biggest gain among 31 major currencies tracked by Bloomberg.

“We don’t see much room for rates easing or an interventionist stance by the Bank of Israel to be sufficient to reverse shekel appreciation trend into 2014,” Mai Doan, a London-based economist at Bank of America Merrill Lynch, wrote in an e-mailed report today.

The Bank of Israel under Fischer had gradually lowered the benchmark rate from 3.25 percent since 2011, including twice in May, to combat the shekel’s rally. About 40 percent of Israel’s economy is derived from exports to markets including the U.S. and Europe. The pace of gross domestic product growth is expected to slow to 3.4 percent in 2014 from 3.6 percent this year, according to a Bank of Israel forecast released yesterday.

Israeli markets will be closed Sept. 25 and Sept. 26 for a holiday.

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