Bloomberg News

Israeli Bonds Fall on Speculation Rate Cuts May Slow on Growth

October 11, 2011

Oct. 11 (Bloomberg) -- Israeli government bonds fell for a fourth day pushing yields to a two-week high on speculation the central bank will hold rates this month as the economy is estimated to expand 4.9 percent this year.

The yield on the benchmark 5.5 Mimshal Shiklit bond due January 2022 rose four basis points, or 0.04 percentage point, to 4.66 percent at the 4:30 p.m. close in Tel Aviv, matching the level on Sept. 27. Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, jumped seven basis points to 2.77 percent.

The economy will probably expand 4.9 percent this year, from 4.8 percent in 2010, the Jerusalem-based Central Bureau of Statistics said today. The estimate outpaces most advanced economies, which are forecast by the International Monetary Fund to grow an average 1.6 percent. The Bank of Israel will leave the rate at 3 percent this month according to 13 of 16 economists in a Bloomberg survey.

“As long as growth remains robust in the 5 percent range, it will be harder for the Bank of Israel to cut rates,” Terence Klingman, the head of research at Meitav Brokerage in Tel Aviv said by telephone. “Much depends on what happens in Europe and how this will affect the Israeli economy.”

Bank of Israel Governor Stanley Fischer lowered the benchmark interest rate for the first time in 2 1/2 years on Sept. 26, citing the worsening global outlook. Three of the 16 economists surveyed expect another 25 basis-point cut this month.

Slowing Inflation

European Union and International Monetary Fund officials indicated today Greece will get an 8 billion-euro ($11 billion) loan next month under a 110 billion-euro bailout. European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis.

Second-quarter growth was 3.7 percent compared with a previous estimate of 3.5 percent, the statistics office said today. Investment in fixed capital will drive 2011 growth, it said

The two-year breakeven rate, which reflects market expectations for inflation over the period, dropped three basis points to 173, implying annual inflation of 1.73 percent. The yield on inflation-linked bonds due June 2013 rose less than one basis point to 1.15 percent.

Inflation likely eased in September as food costs declined following consumer protests and as end-of-summer sales brought down apparel prices. Annual inflation slowed to 3.2 percent from 3.4 percent, according to the median estimate of 17 economists surveyed by Bloomberg. The statistics bureau is scheduled to release the data Oct. 14.

The shekel strengthened for a second day, gaining 0.3 percent to 3.6815 per dollar at 4:50 p.m. in Tel Aviv. The Tel- Bond 40 index of corporate bonds climbed 0.4 percent.

Israeli markets will be closed until Oct. 16 for a holiday.

--Editors: Susan Lerner, Claudia Maedler

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


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