Bloomberg News

Israel Inflation Bets Rise to 1-Week High on Energy Costs, Rate

February 03, 2012

Feb. 2 (Bloomberg) -- Israeli inflation expectations soared to the highest level in a week on speculation consumer prices will climb as energy costs rise and interest rates fall.

The one-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government notes of similar maturity, rose four basis points, or 0.04 percentage point, to 215 at the 4:30 p.m. close in Tel Aviv. That is the highest since Jan. 26 and implies an average annual inflation rate of 2.15 percent. The yield on the inflation-linked bonds due June 2013 dropped five basis points to 0.25 percent, the lowest level in almost a year.

Electricity prices may be increased 6.6 percent this month to offset higher costs due to disruptions in shipments of natural gas from Egypt and an expected reduction in supply from the local Yam Tethys site, the Public Utility Authority said Jan. 26. Israeli self-serve gasoline prices rose 3.2 percent yesterday. Bank of Israel Governor Stanley Fischer yesterday said there is “plenty of room” to cut interest rates if needed.

“The trend of rising energy costs and interest rates going down makes inflation-linked bonds more attractive,” said Rafael Gozlan, chief economist at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv.

Economists’ 12-month inflation expectations were at 2.3 percent, the central bank said Jan. 17. The annual inflation rate fell to 2.2 percent in December, the lowest in more than a year. The central bank’s monetary committee, led by Fischer, lowered the benchmark lending rate to 2.5 percent on Jan. 23, the third reduction in five months.

Corporate Bonds

The Tel-Bond 40 index of corporate bonds advanced 0.1 percent to 264.56, the highest since July, as optimism for a global recovery fueled demand for higher-yielding assets.

The short-term economic situation in Israel is “under control” as Europe’s situation is improving, Fischer said yesterday. Corporate-default risk fell to a five-month low in Europe yesterday as growth in production from America to China fuels optimism that companies will withstand the euro-area sovereign crisis.

“European leaders seem to be advancing steps to solve the crisis and global growth data seems to be improving which is driving investors’ appetite for riskier assets,” said Guy Lazarovich, a bond trader at I.B.I.

The yield on the benchmark 5.5 percent bonds due in January 2022 was unchanged at 4.46 percent. The shekel rose 0.1 percent to 3.7248 a dollar at 4:52 p.m.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, gained two basis points to 2.46 percent.

--Editors: Susan Lerner, Shanthy Nambiar

To contact the reporters on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net; Susan Lerner in Jerusalem at slerner2@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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