Bloomberg News

Israel Record Rate Swaps Over U.S. Signal Shekel May Gain

June 21, 2011

(Updates swap prices in the sixth paragraph.)

June 21 (Bloomberg) -- Israel’s interest-rate swaps are rising above contracts of the U.S. by the most on record, signaling that the shekel may extend a 12-month rally.

The spread between Israel’s five-year interest-rate swaps and similar maturity U.S. notes rose last week to 282 basis points, or 2.82 percentage points, the biggest gap on record, data compiled by Bloomberg show. The average spread since 2005 between the two swaps, which investors use to fix borrowing costs in the future, is 135 basis points.

While Federal Reserve Chairman Ben S. Bernanke said this month that stimulus is still needed to boost a “frustratingly slow” U.S. recovery, Israel’s accelerating growth has pushed central bank Governor Stanley Fischer to raise the benchmark interest rate four times this year. Higher rates have drawn capital and strengthened the shekel, which is up 12 percent in the past year through yesterday to 3.4390 per U.S. dollar.

“This discrepancy would suggest that the shekel should be trading at higher levels,” Bartosz Pawlowski, an emerging- market strategist at BNP Paribas SA, said by telephone from London. “In the U.S. there was a soft patch of economic data. In Israel, the central bank has been hiking rates.”

Gains in the shekel boosted the appeal for the local debt with the yield on Israel’s benchmark Mimshal Shiklit bond due January 2020 falling 20 basis points from a record high 5.36 percent level reached on April 11.

Five-Year Swaps

U.S. five-year swaps, which reflect expectations for the average benchmark rate over five years, have dropped 32 basis points this year to 1.85 percent, while the same maturity Israeli notes climbed 66 basis points during the same period to 4.56 percent. The spread between the two notes was at 271 basis points by 9:41 a.m. in New York.

The Bank of Israel has raised rates this year by 125 basis points to 3.25 percent, the fourth biggest increase after Belarus, Chile and Brazil, among 50 key central banks tracked by Bloomberg. The U.S. Federal Reserve left rates unchanged at 0.25 percent and the Euro region raised the refinance rate by 25 basis points in 2011 to 1.25 percent.

The Bank of Israel last raised rates by a quarter percentage point on May 23. The central bank will probably leave rates unchanged when it next meets on June 27, according to the median estimate of 17 economists.

The shekel has been the best performer among Middle East currencies in the past three months, gaining 3.4 percent versus the dollar and 2.3 percent versus the euro.

Business Cycle

Israel’s currency “doesn’t share the structural challenges that are holding the U.S. economy down and are making people nervous about the European economies,” said Koon Chow, a London-based emerging markets strategist at Barclays Capital. “The U.S. going into a second patch of weakness compares with the Israeli economy, where the business cycle continues to develop.”

Growing concern about Europe’s debt crisis and a slowdown in the U.S. economy may curb gains in the shekel, said Benoit Anne, head of global emerging-markets strategy in London at Societe Generale, France’s second-largest bank.

“Israel is highly leveraged to global growth expectations and that’s a tricky part right now,” he said by phone from Paris. “It’s only going to change if we get the green light from the markets that the Greek crisis is over and get confirmation that global growth is slowing just marginally.”

Israel recovered from the global recession with growth of 4.65 percent last year. The economy is likely to expand 5.2 percent this year and 4.2 percent in 2012, the central bank said in a June 1 forecast.

Greenspan Comments

Alan Greenspan, the former Federal Reserve chairman, said in an interview with Charlie Rose last week that an “almost certain” default by Greece would send the U.S. economy back into a recession. The U.S. economy will grow 2.5 percent in 2011 and 2.95 percent in 2012, according to the median estimates of economists surveyed by Bloomberg.

Israel’s unemployment rate fell to 6 percent in the first quarter from 6.5 percent in the fourth. The jobless figure will probably decline to 5.8 percent for the year, according to the central bank forecast. In the U.S., the jobless rate rose to 9.1 percent from 9 percent, Labor Department data showed on June 3.

In August 2009, Fischer became the first central bank chief to reverse course in response to signs of a financial recovery when he raised the benchmark interest rate by a quarter point from a record low 0.5 percent.

“This rate spread reflects the underlying divergences in growth in the two economies,” Chow said.

--Editors: Brendan Walsh, Richard Richtmyer

To contact the reporter on this story: Tal Barak Harif in New York at

To contact the editors responsible for this story: Claudia Maedler at; David Papadopoulos at

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