The turmoil in government-bond markets around the world has finally reached Israel, with the price of the treasury’s shekel bond due in 2042 falling as much as 2.25% on Tuesday before posting a slight recovery.
The bond has seen its yield climb to 2.93% from just 2.45% two weeks ago. Likewise, the government’s inflation-linked Galil bond due in 2045 fell by as much as 2% on Tuesday, boosting its yield to 2%.
The bond market’s woes have spread to shares as well, where the Tel Aviv Stock Exchange’s benchmark TA-25 index finished down 0.6% at 1,683.83 points on Tuesday. The broader TA-100 index lost 0.8% to a 1,424.67 finish. Turnover was 1.28 billion shekels ($333.5 million).
The sharp and sudden increase in yield in recent weeks comes after a long period of rising prices and yields at record lows, in some cases below zero after inflation.
“The market was priced too high and so the increases in yields that we’re seeing are reasonable,” said Zvi Stepak, a founder and principal of investment house Meitav Dash. He added that the trend is likely to continue unless there is a major geopolitical crisis, like Russia’s interference in Ukraine last year, or if the U.S. economic recovery is delayed and the Federal Reserve holds off a rate rise as a result.
A global fixed-income rout is spreading to other markets as the European Central Bank’s quantitative easing pushes global debt valuations to extreme levels while traders grow more confident that the Federal Reserve will delay raising interest rates until later this year to allow for the economic recovery to gain momentum. The sell-off has pushed U.S. and German 10-year yields to the highest level this year, although U.S. Treasury yields, the benchmark for global borrowing costs, pulled back late on Tuesday after reaching their highest since mid-November earlier in the day.
In Israel’s fixed-income market, the Tel-Bond 20, 40 and 60 indexes were down as much as 0.5% while the government’s Shahar bond due in March 2024 fell 0.75% to raise its yield to 1.81% and Galil bonds due in September 2023 fell 0.85% to put its yield into positive territory of 0.03%.
“The increase in Israeli yields is entirely being imported from Europe and the United States,” said Roni Filo, chief investment officer at IBI Israel Brokerage & Investments. In the past month yields on 10-year U.S. treasuries have risen to 2.3% from 1.9% while their German equivalents rose to 0.7% from 0.15% and their Israeli peers to 2% from 1.65%.
“There’s a sense, which we think has no basis, that world economic growth is likely to be higher than forecast and that a lot of quantitative easing will end faster than expected,” Filo said, referring to programs in which central banks buy government bonds to inject more liquidity into the economy to in order encourage growth.
“We don’t believe the economic data that have been released, neither the U.S. employment data nor the data from Europe, point to strong growth,” he said.
In financial markets, there’s a sense the record-low yields for government bonds did not adequately price risk. “Yields in Germany fell to illogical levels — 10-year bonds without even a nominal return. Pricing today is much more reasonable than two weeks ago,” said Filo.
One reason for the falling yields on Israeli government bonds is the high levels of liquidity in the financial system. “Someone with a Pakam with zero interest is opting to invest in government bonds,” Stepak said, referring to short-term deposits. “From there, they go into corporate stocks and bonds, he continued.
“But the current situation can’t last. For example, for over half a year Israeli bonds have been trading at lower yields than U.S. bonds for all terms. This can’t continue over the long term. [Moreover] the risk spread between different bonds — for instance between bank bonds and government bonds or variably rated bonds — are too low in terms of their yields,” Stepak said.