The storm aroused by the Bank of Israel in the local capital market yesterday did not subside today. The shekel rose a further 0.2% against the dollar, 20-30 year Israel government bonds lost 0.5% of their value, and 7-10-year bonds fluctuated during trading between -0.3% and 0.1%. A look at the figures shows that the shekel devaluation against the basket of foreign currencies in the second half of 2014 has been wiped out, while the recent slide in the bond market almost complete wiped out the gains since the beginning of the year. For example, shekel bonds redeemable in October 2026 are now showing a return of only 1% since the beginning of the year, after losing 8% within two months (including a 2% drop in the past two days).
The volatility in government shekel bonds redeemable in January 2042 is, of course, even greater. These bonds have lost 16% since the last week in April (including 4% since the beginning of this week), and are now 2.2% higher than at the beginning of the year.
The steep falls in recent days are a direct result of the aggressive approach championed by Governor of the Bank of Israel Dr. Karnit Flug and Bank of Israel Research Department director Prof. Nathan Sussman at the press conference following the Monetary Committee's decision to leave the interest rate at 0.1%. Flug hinted that the yield to maturity on government bonds was falling too slowly, and that the bank would not intensify its battle against the strengthening shekel, despite a 1.5% decrease in Israeli exports in the first quarter of the year. For his part, Sussman raised his 2016 growth forecast (including higher forecasts for exports and private consumption), and added a forecast that the inflation rate in the next 12 months would be 1.6%, while the Bank of Israel interest rate (which he helps to set) would rise from 0.1% to 1.25% in 2016 (meaning that the interest rate would be raised five times). These forecasts, perceived as the Bank of Israel's working assumptions, caused pressure on traders and steep declines in bond prices and shekel exchange rates against foreign currencies.
Excellence Investments Ltd. (TASE: EXCE) chief economist Yaniv Hevron, for example, wrote today that raising the inflation forecast and interest rate forecast had provided additional support for an improvement in the interest rate forecasts, while describing the growth forecast as "particularly bullish." Hevron also predicted that the rise in yields in Israel would continue in line with the trend in Europe and the US. "In my opinion, the result at the end of the year will be a negative return in the bond market for 2015," Hevron wrote.
Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2015
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