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The Finance Ministry has canceled plans to issue $1 billion in bonds overseas in the next few days. For now, foreign issues have been frozen, and it seems they will only resume after the summer.

It is still not completely clear why the treasury decided to freeze its plans, but it is most likely due to a combination of factors: higher interest rates for government bonds and the possibility that the major rating agencies might change Israel's standing. In addition, the treasury does not want the bonds issued abroad to be bought up by Israeli investors, as happened with the previous issue.

The treasury is still scheduled to issue a large sum toward the end of the month. The bonds will be spread over 2-year, 5-year and 7-year maturities.

Three months ago the treasury raised $1.5 billion, its largest foreign issue ever.

The treasury will have to raise record amounts of funds in 2009 and 2010 to cover the steep drop in tax revenues, as well as to roll over a number of bond issues that will come due.

Bond markets rose yesterday, with long-term Shahar government bonds increasing by up to 0.4%. Galils also rose by about the same amount, while corporate bonds increased more moderately. The TelBond-20 was up 0.1% and the TelBond-40 rose 0.3%.

The rise in government bonds reflected gains on Friday in the U.S. as the U.S. Treasury issued $65 billion last week, with a wide range of maturities.

"Market expectations for inflation have risen recently," said Ron Eichel, chief economist and strategist at the Meitav investment house. "For example, while expectations pointed to deflation toward the end of 2008, even for a 5-year period, now expectations are rising an reflect expected inflation of 1.9% a year for each of the next 5 years."

(Yuval Maoz contributed to this report)