Israel shekel, bond yields weaken to 2-week low on rate bets

The shekel dropped the most in a week as speculation interest rates may fall in coming months reduced the allure of assets denominated in the currency.

The central bank, led by Governor Stanley Fischer, probably will hold the benchmark lending rate at 3.25 percent today for a fourth month after inflation accelerated in August, according to 20 of 22 economists in a Bloomberg survey. Two predicted a quarter-point cut.

“Foreign investors are slowly moving out of shekel positions as the rate differential with the U.S. may not widen and is expected to narrow in coming months,” Eytan Admoni, head of the international department at Bank of Jerusalem Ltd., said by telephone. “Interest rates may not be cut as early as today as inflation in August was higher than forecast but prices are expected to come down on the back of a slowdown in the global economy.”

The currency lost 0.5 percent to 3.7204 per dollar at 3:06 p.m. in Tel Aviv after dropping as much as 1.1 percent, the most in a week. The two-year breakeven rate, which reflects market expectations for inflation over the period, was little changed at 189 basis points. That implies an average annual inflation rate of about 1.89 percent over the period. The yield on the CPI-linked bond due June 2013 dropped eight basis points, or 0.08 percentage point, to 1.13 percent.

August Prices

Consumer prices advanced in August 0.5 percent from the previous month as housing costs rose 1.3 percent, the largest monthly increase since February, the Central Bureau of Statistics said Sept. 15.

The country’s Purchasing Managers Index declined to 48.4 in August from 49.4 in the previous month, Bank Hapoalim Ltd. said in a report today. The unemployment rate was 5.4 percent in July, the same as in the previous month, the Central Bureau of Statistics said in an e-mailed statement today.

The yield on the Mimshal Shiklit bond due January 2020 fell five basis points to 4.49 percent, the lowest since Sept. 11. The rate on the 5.5 percent bond maturing in January 2022 dropped four basis points to 4.69 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, gained for a second day, increasing 0.7 percent.

Economic Growth

Fischer said Sept. 18 that he is concerned about the possible effects of a global slump on Israeli exports. The Bank of Israel last week cut its growth forecast for next year to 3.2 percent from 3.9 percent citing expectations for slower export growth. The IMF forecast for Israel is for economic growth of 3.6 percent in 2011.

The economy will probably grow 5 percent this year, led by investment in fixed capital including housing, the official statistics office said today.

Finance Minister Yuval Steinitz said in a Sept. 20 interview in New York that the shekel’s drop this year is sufficient to benefit the economy and the government doesn’t plan to push for further weakening. The currency accelerated declines after the comments to 5.4 percent against the dollar this year from 4.3 percent amid growing concern that the global economy is headed for a recession.

Steinitz said further declines in the currency could affect inflation. “If it’s too weak, then the cost of living is going up, the imported commodities will be more expensive.”

The shekel is the fifth-worst performer among the 10 most- active Europe, Middle East and Africa currencies this year, according to Bloomberg data.

Bond Auction

The Finance Ministry raised 1.45 billion shekels ($389 million) at debt auctions today. The sale included 250 million shekels of 5.5 percent bonds due in January 2022 at an average price of 108.94. That compares to a current market price of 109.18.

“Investors did not rush to buy at the auction although prices closed below market prices,” Assaf Rosenberg, a trader at Excellence Nessuah Investment House Ltd., said by telephone. “All eyes today are on the interest rate decision as there are chances that the central bank might cut borrowing costs.”

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, declined 13 basis points to 2.80 percent, the lowest since Sept. 5.