Bloomberg News

Israel 10-Year Bonds Rise to 2-Week High on Inflation, Rate Bets

June 12, 2011

June 12 (Bloomberg) -- Israel’s 10-year government bond yields climbed to the highest level in more than two weeks on bets inflation accelerated in May, increasing the likelihood the central bank will boost interest rates this month.

Yields rose to the highest since May 25 as the median estimate of 12 economists in a Bloomberg survey forecast annual inflation may quicken to 4.2 percent in May from 4 percent in April. The yield gap between inflation-linked bonds due June 2012 and fixed-rate notes of similar maturity has widened 12 basis points, or 0.12 percentage point, to 350.1 since May 16, a day after the statistics bureau said April inflation slowed from 4.3 percent the previous month. That implies expected inflation of 3.5 percent, up from about 3.4 percent.

“Consumer prices in May are expected to be high because of an increase in fruit and vegetable prices due to a seasonal change to the summer, which is coming a little late,” Yaniv Hevron, head of macro-strategy at Ramat Gan, Israel-based Excellence Nessuah Investment House Ltd., said by telephone. “If the CPI figures show a surprise increase of more than what’s expected for the season, the yield can be expected to move higher, raising bets the central bank will increase borrowing costs.”

The yield on the benchmark Mimshal Shiklit note due January 2020 rose one basis point to 5.1 percent at the 4:30 p.m. close in Tel Aviv. The yield has gained 41 basis points this year as Bank of Israel Governor Stanley Fischer increased interest rates by 2.75 percentage points since August 2009 in an attempt to rein in inflation. The Jerusalem-based Central Bureau of Statistics will release the latest price data June 15.

Fischer said yesterday he’s a candidate for managing director of the International Monetary Fund.

The shekel weakened 0.7 percent to 3.4080 per dollar on June 10.

Fund Redemptions

About 1.3 billion shekels ($381 million) were redeemed from so-called traditional mutual funds so far this month, including 870 million shekels from corporate-bond funds, according to Tel Aviv-based Meitav Investment House Ltd. Money-market funds raised 1.06 billion shekels, while short-term government bonds drew 262 million shekels.

“The pace of redemptions is picking up as global stock markets are down and investors are pulling out of risky assets,” Rony After, mutual funds analyst at Meitav, said by telephone. “Outflows are continuing the trend from May amid negative sentiment spurred by concern about recovery in the U.S. economy and the Greek debt crisis.”

The Tel Aviv 25 Index of the country’s 25 biggest companies fell 1.3 percent to 1,204.19. The gauge has dropped 5 percent this month and 9.2 percent this year. The Standard & Poor’s 500 Index is down 5.5 percent this month.

Outflows from Israeli corporate bond and mixed-securities funds in May were the highest in almost three years, Meitav said June 1. About 3.5 billion shekels were redeemed from traditional mutual funds last month, including 2.6 billion shekels from corporate-bond and mixed stock and bond funds, the biggest redemption since November 2008.

--Editors: Gavin Serkin, Susan Lerner

To contact the reporter on this story: {Sharon Wrobel} in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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