Bloomberg News

Israeli Inflation-Linked Bonds Drop on Bets Prices to Decline

May 15, 2012

Israeli consumer price-linked bonds declined, pushing yields higher for the first time in three days, on speculation inflation may slow in coming months as economic growth falters.

The yield on the 3.5 percent inflation-linked notes due April 2018 rose three basis points, or 0.03 percentage point, to 1.15 percent at the close in Tel Aviv. The two-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, fell nine basis points to 275, implying an average annual inflation rate of 2.75 percent. The Jerusalem-based Central Bureau of Statistics will release April inflation data at 6:30 p.m. local time.

The economy grew an annualized 2.5 percent in the first quarter, the slowest pace since the three months ended June 2009, according to the median estimate of 11 economists on Bloomberg. The statistics bureau is set to release the data tomorrow. Unemployment rose to 6.9 percent in March from 6.5 percent the previous month, the statistics bureau said April 30.

“Inflation is expected to moderate in coming months on the back of weaker demand and rising unemployment affected by a global economic slowdown,” said Yaniv Hevron, head of macro-strategy at Ramat Gan, Israel-based Excellence Nessuah Investment House Ltd. “In this environment, we recommend non-linked government bonds over consumer-price linked bonds.”

Slowing Growth

The yield on the 5.5 Mimshal Shiklit bonds due January 2022 increased one basis point to 4.54 percent, while the yield on the 3.5 percent notes due September 2013 fell two basis points to 2.49 percent, matching the low on February 2.

Economic growth is expected to slow to 3.1 percent this year from 4.8 percent in 2011, the central bank said on March 26. One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped three basis points to 2.39 percent, matching the level on Feb. 15.

Consumer prices rose 0.8 percent in April from the previous month as electricity and gasoline costs increased, according to the median estimate of 14 economists surveyed by Bloomberg. Electricity prices rose by 8.9 percent at the beginning of April, and gasoline prices increased 0.6 percent in the month, the Ministry of Energy and Water Resources said.

The shekel strengthened less than 0.1 percent to 3.8287 a dollar at 4:50 p.m. in Tel Aviv. The Tel Aviv Bond 40 Index, a measure of inflation-linked and fixed-rate corporate bonds, dropped the most since March 29, declining 0.6 percent.

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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