Bloomberg News

Israel Two-Year Swaps Drop to Lowest in Year on Rate-Cut Bets

December 16, 2011

Dec. 15 (Bloomberg) -- Israel’s two-year interest-rate swaps plunged to the lowest level in more than a year on bets the central bank will cut interest rates as inflation stays within its target range for a third month.

The swap rate, an indicator of investor expectations for rates over the period, fell three basis points, or 0.03 percentage point, to 2.58 percent at 4:30 p.m. in Tel Aviv, matching the level in September 2010. The yield on the 5.5 percent benchmark bonds due January 2022 dropped five basis points to 4.65 percent, the lowest since Nov. 20.

The Jerusalem-based Central Bureau of Statistics will probably report today that consumer prices increased 2.8 percent in November compared with 2.7 percent in October, according to the median estimate of 11 economists surveyed by Bloomberg. That’s within the central bank’s target range of 1 percent to 3 percent. Governor Stanley Fischer cut the benchmark interest rate to 2.75 percent for the second time in three months on Nov. 28 as the European debt crisis hurt the country’s economy.

“The rise in prices is temporary and not so much of concern to the market,” Shuki Arditi, a bond trader at Leader Capital Markets Ltd. in Tel Aviv, said by telephone. “Concern over a slowdown in economic activity expressed by the Bank of Israel, raises the likelihood that the bank will lower borrowing costs in coming months.”

Economic Outlook

The central bank will probably reduce its growth forecast for 2012 as the European debt crisis weighs on the global economy, Fischer said on Dec. 7. The bank’s new growth prediction will probably be “around” the Organization for Economic Cooperation and Development’s 2.9 percent forecast, Fischer said. The central bank in September forecast growth of 3.2 percent next year after 4.7 percent in 2011.

The yield on the CPI-linked notes due June 2013 was little changed at 0.55 percent. The two-year breakeven rate, the difference between inflation-linked bonds and similar-maturity fixed-rate government debt, fell two basis points to 208, implying an average annual inflation rate of 2.08 percent.

Consumer prices probably increased 0.2 percent last month from 0.1 percent in October, according to the median forecast of 12 economists in a survey.

The shekel strengthened 0.4 percent against the dollar to 3.7952, trimming the monthly decline to 1 percent. The currency has tumbled 7.1 percent this year, headed for the biggest loss since 2002. The Tel Aviv Bond 40 Index, a measure of inflation- linked and fixed-rate corporate bonds, fell less than 0.1 percent.

--With assistance from Zoya Shilova in Moscow. Editors: Claudia Maedler, Daliah Merzaban

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editor responsible for this story: Claudia Maedler at

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