Israeli Inflation-Linked Bonds Drop on Bets Prices to Decline

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 two basis points, or 0.02 percentage point, to 1.14 percent at 11:16 a.m. 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 four basis point to 281, implying an average annual inflation rate of 2.81 percent. The Jerusalem-based Central Bureau of Statistics will release April inflation data today.

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 surveyed by Bloomberg. The statistics bureau is scheduled 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.

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. Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, was unchanged at 2.57 percent.

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 0.1 percent to 3.8258 a dollar. The Tel Aviv Bond 40 Index, a measure of inflation-linked and fixed- rate corporate bonds, fell for a third day, declining 0.3 percent to 264.13.

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