Bloomberg News

Israel 10-Year Bonds Rise a Seventh Day on Rate Cut Speculation

October 02, 2011

Oct. 2 (Bloomberg) -- Israel’s 10-year government bond advanced for a seventh day, pushing yields to the lowest level in almost a month, on speculation the Bank of Israel will cut interest rates to support growth as the global economy falters.

The yield on the 5.5 percent Mimshal Shiklit government notes due January 2022 dropped two basis points, or 0.02 percentage point, to 4.64 percent at the 4:30 p.m. close in Tel Aviv, the lowest since Sept. 5. The yield on the inflation- linked bond due June 2013 climbed six basis points to 1.06 percent.

Bank of Israel Governor Stanley Fischer on Sept. 26 cut the lending rate to 3 percent from 3.25 percent, the first decrease in 2 1/2 years, in a bid to shore up growth and shield the economy from a global slowdown. The International Monetary Fund on Sept. 20 cut its estimate for global growth and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over a fiscal plan.

“As the world fears a global slowdown, expectations in Israel are that this will lead to a continued drop in interest rates and slowing inflation,” Sagie Poznerson, head of trading at Leader Capital Markets Ltd. in Tel Aviv said by telephone.

Falling Rates

The benchmark lending rate may decline to 2.5 percent by the end of the year, Goldman Sachs Group Inc. said Sept. 27, while Citigroup Inc. forecast the central bank will probably make another quarter-point cut this year. Two-year interest-rate swaps, an indicator of investor expectations for rates in the next two years, were at 2.75 percent on Sept. 30, showing traders are betting on another reduction.

Inflation may slow after commodities posted the biggest quarterly drop since the end of 2008 as bearish data on economies in Europe and China added to concerns the world will tilt into another recession. The two-year breakeven rate, which reflects market expectations for inflation over the period, declined five basis points to 194 today, implying an average annual inflation rate of 1.94 percent.

“Inflation expectations are low because of the global slowdown and the consumer protests,” Gil Chen, a bond trader at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv said by telephone.

Tnuva Food Industries Agricultural Co-Op In Israel Ltd. said today it would cut the prices it recommends supermarkets charge consumers on some dairy products and Strauss Group Ltd. said it was cutting the price of some of its milk products 12 percent. A government-appointed panel last week submitted proposals aimed at bringing down living costs following consumer protests over the past three months.

Annual inflation in Israel slowed to 3.4 percent in August from a high this year of 4.3 percent in March. Consumer prices are expected to rise 2.3 percent in the next 12 months, according to the average of forecasters surveyed by the Bank of Israel, the bank said Sept. 20.

The Tel Bond 40 index of corporate bonds fell 0.5 percent. The shekel weakened for a third day on Sept. 30, dropping 0.6 percent to 3.7486 per dollar.

--Editors: Susan Lerner, Shanthy Nambiar

To contact the reporter on this story: Shoshanna Solomon in Tel Aviv at ssolomon22@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net -0- Oct/02/2011 15:08 GMT


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