Israeli Bonds Gain to Five-Month High as Flug Signals Rate Cuts

Updated on
  • Yields may fall as much as 20 basis points, IBI analyst says
  • Economy facing slowest growth rate since 2009 amid violence

Israeli government bonds gained, pushing yields to the lowest since May, as investors predicted central bank Governor Karnit Flug will be open to resuming interest-rate cuts to shore up the economy.

The government’s local-currency notes due in August 2025 climbed 0.8 agora to 98.97 agora on the shekel, advancing for the second day after the Bank of Israel said Monday that “monetary policy will remain accommodative for a considerable time." The yield, which fell nine basis points to 1.90 percent, may decline as much as 20 basis points in coming weeks, according to Gil Chen, head of the fixed-income desk at Israel Brokerage & Investments Ltd. in Tel Aviv.

“All the factors supporting another rate-cut in coming months are there,” Chen said by phone. “Institutional investors are starting to buy non-linked government bonds following Flug’s comments.”

Israel’s economy is headed for the slowest pace of growth since 2009 amid a surge in violence that the central bank, which kept borrowing costs near zero for an eighth month on Monday, said may have an effect on private consumption and tourism. Policy makers, who slashed the benchmark rate 13 times since 2011, have struggled to curb gains in the best-performing major currency in 2015 and tackle deflation.

Consumer prices decelerated for a 13th month in September. The shekel strengthened 0.2 percent to 3.8665 per dollar at 6:18 p.m. in Tel Aviv, bringing gains this year to 0.9 percent, the most among 31 major currencies tracked by Bloomberg.

Shekel forward-rate agreements, used to speculate on rate moves for the next three months, are trading six basis points below the central bank base rate of 0.1 percent, indicating that investors expect more monetary easing.