Bloomberg News

Israeli Short-Term Bonds Fall as Europe Boosts Demand for Risk

February 24, 2012

Feb. 23 (Bloomberg) -- Israeli short-term government bonds fell, pushing yields to the highest in almost five weeks, after a bigger-than-expected rise in German and Italian consumer confidence boosted demand for riskier assets.

The yield on the 3.5 percent bonds due September 2013 increased two basis points, or 0.02 percentage point, to 2.63 percent, the highest since Jan. 23, at the 4:30 p.m. close in Tel Aviv. Yields on longer-term debt fell. On the 5.5 percent bond due January 2042, the yield declined one basis point to 5.49 percent, while the rate on the 5.5 percent bonds due in January 2022 was unchanged at 4.63 percent.

German business confidence rose to the highest in seven months in February as progress in taming Europe’s debt crisis tempered the risk of a recession. Italy’s consumer confidence index rose to 94.2 from a revised 91.8 in January, above the 92.1 median estimate of 10 economists in a Bloomberg News survey. Exports make up about 40 percent of the Israeli economy and Europe is one of its largest markets.

“Positive sentiment surrounding the situation in Europe is contributing to a decline in the risk premium of Israeli assets and boosting appetite for higher-yielding assets,” said Guy Lazarovich, a bond trader at IBI-Israel Brokerage & Investments Ltd. in Tel Aviv. “Investors are lengthening positions buying longer-term bonds and selling shorter-term notes.”

Inflation Expectations

The one-year break-even rate, the difference between inflation-linked bonds and similar-maturity fixed-rate government debt, rose less than one basis point to 264. That implies an average annual inflation rate of 2.64 percent. Economists’ 12-month inflation expectation was 2.4 percent, the Bank of Israel said on Feb. 19.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell one basis point to 2.48 percent. The rate advanced 14 basis points this month.

The Bank of Israel’s monetary committee, led by Governor Stanley Fischer, will hold the benchmark interest rate at 2.5 percent at a policy meeting on Feb. 27, according to all 22 economists in a Bloomberg survey. The central bank lowered borrowing costs to 2.5 percent on Jan. 23, the third reduction in five months.

The central bank and the Finance Ministry have reduced their growth predictions for this year, citing the impact of the European debt crisis. The economy expanded an annualized 3.2 percent in the fourth quarter compared with a revised 3.8 percent in the third quarter as exports and private consumption declined, the statistics bureau said Feb. 16.

The Tel-Bond 40 Index of corporate bonds was little changed at 264.04. The shekel gained 0.2 percent to 3.7543 a dollar at 5:06 p.m. in Tel Aviv.

--Editors: Daliah Merzaban, 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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