Bloomberg News

Israel Short-Term Notes Drop on Bets Central Bank to Hold Rates

January 23, 2012

Jan. 22 (Bloomberg) -- Israel’s short-term government bonds declined, pushing yields to the highest level in more than five weeks, on speculation the Bank of Israel will refrain from lowering interest rates at a policy meeting tomorrow.

The yield on the 3.5 percent notes due August 2014 climbed two basis points, or 0.02 percentage point, to 2.94 percent as of 2:48 p.m. in Tel Aviv, the highest since Dec. 14. Shorter- term notes are typically more sensitive to rate fluctuations. The central bank will maintain the benchmark rate at 2.75 percent, according to 11 of 20 analysts in a Bloomberg survey. The remainder forecast a 25-basis-point reduction.

“Yields on shorter-term bonds are rising as the market is pricing in that interest rates may hold this month as global financial markets are calming down,” said Amir Haik, chief economist at Union Bank of Israel Ltd., in Tel Aviv.

Global stocks rose last week after better-than-forecast U.S. economic data showed the world’s largest economy is recovering and declining borrowing costs in Europe signaled the debt crisis may be easing. Greece and its private creditors said they made progress during talks in Athens on a debt-swap accord needed to lower the country’s borrowings and clear the way for a second round of international aid.

The yield on the benchmark 5.5 percent bonds maturing in January 2022 gained three basis points to 4.5 percent. The Finance Ministry plans to auction a total of 1.5 billion shekels ($397 million) of debt tomorrow, including 300 million shekels of the benchmark bonds and 250 million shekels of the notes due August 2014.

Interest Swaps

The central bank may reduce the key rate 27 basis points over the next 12 months, according to one-year interest-rate swaps on Jan. 20. That compares with 43 basis points of cuts priced in on Dec. 19.

A poll of 550 investment advisers conducted today showed 78 percent expect the Bank of Israel will hold the interest rate tomorrow, Psagot Investment House Ltd. said. The remainder predicted a quarter-point reduction, Psagot said.

“Looking ahead to the end of the first quarter, the central bank is expected to lower rates by between 25 to 50 basis points as the crisis in Europe won’t be resolved so quickly,” Union Bank’s Haik said.

The yield on inflation-linked bonds due June 2013 fell two basis points to 0.47 percent. The two-year break-even rate, the yield difference between the inflation-linked bond and fixed- rate government bonds of similar maturity, increased six basis points to 209, implying an average annual inflation rate of 2.09 percent, the highest since Dec. 15.

The Tel-Bond 40 index of corporate bonds fell less than 0.1 percent to 263.32.

The shekel declined 0.1 percent to 3.7811 a dollar on Jan. 20.

--Editors: Susan Lerner, Claudia Maedler

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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