6/19/2024–|Last updated: 6/19/202406:14 PM (Mecca time)
The yield on Israeli government bonds denominated in shekels for 10 years recently exceeded 5% for the first time since 2011, which reflects a significant decline in demand, according to a report published by the Israeli platform Globes.
Although the yield has since fallen to about 4.85%, the volatility in what is usually considered a stable investment indicates growing economic concerns, Globes said.
Comparison with US Treasury bonds
The yield on 10-year US Treasury bonds, considered very safe, fell sharply to below 1.6% after the inflation figures were published in May.
In contrast, the decline in Israeli bond yields was more modest. This discrepancy is partly due to the fact that the US market expects an imminent cut in interest rates, while Israel faces economic and security uncertainty, which weakens expectations for similar moves in monetary policy, according to the same source.
To measure the extent to which foreign investors are aware of the risks of investing in Israel, Globes says that the yield difference between Israeli and American government bonds is crucial. This difference indicates differences in credit risks between countries, with wider differences indicating higher expected risks.
Currently, the spread on 10-year Israeli government bonds in dollars is 1.75% higher than on equivalent US securities, and is close to the levels seen in developing economies such as the Dominican Republic, where the spread is 2.05%, as noted by Globes. By comparison, the difference in Hong Kong is only 0.1%.
Modi Shafrir, chief financial markets strategist at Israel’s Hapoalim Bank, points out to Globes that Israel’s current pricing is more consistent with a BBB rating rather than the official “A-band” rating from agencies like Moody’s and S&P. Bors.
“We are not in a high-risk classification, but the risk premium in Israel continues to rise compared to other countries,” Shafrir says.
The impact of war and economic policy
Globes confirms that the ongoing war on the Gaza Strip greatly affects economic stability in Israel, which has contributed to the rise in the cost of bonds.
The Ministry of Finance primarily collects debt in the local market, where risks are lower and returns are lower compared to dollar-denominated bonds, according to what the platform reported.
Credit default swaps
The risk premium on 10-year Israeli government bonds, as credit default swaps indicate, has more than doubled since the war began, Globes reported.
The chief economist at Mitaf Dash, Alex Zabiginski, explains in statements to the platform that Israel’s risk premiums in international markets are much higher than what can be expected from its credit rating.
“The widening of the gap between Israeli shekel bonds and US government bonds to levels not seen in a decade indicates a rise in risk premia,” Zabijinski says.
Government and central bank response
In response to the deteriorating situation, Zabiezinski suggests that the Bank of Israel could intervene in the domestic bond market if it becomes dysfunctional, similar to the actions of the Bank of England two years ago. However, he stresses that the primary responsibility lies with the government to implement credible economic policies.
Recently, Israel’s fiscal deficit has ballooned to 7.2% of GDP according to official data, with government spending rising by 10% compared to the same period last year, even excluding war-related expenses.
Historical examples, such as the devaluation of the currency in Mexico due to controversial legal reforms and the rise in bond yields in the United Kingdom in the wake of an expanded economic programme, highlight the potential risks of losing investor confidence, according to the platform.
