In First Since 2009 Crisis, Bank of Israel Is Buying Government Bonds

Expansionary monetary policy aimed at stabilizing capital market has only a modest impact on its first day

Bank of Israel Governor Amir Yaron with Health Ministry Director General Moshe Bar Siman speak after a coronavirus emergency meeting.
Emil Salman

For the first time since the global financial crisis more than a decade ago, the Bank of Israel said Sunday it would buy government bonds on the open market with the aim of restoring calm to the bond market in the wake of the volatility caused by the outbreak of the new coronavirus.

The decision to resume a policy of quantitative easing came after the prices of Israeli government bonds dropped sharply on Wednesday and Thursday, causing their yields to rise. The central bank’s monetary policy committee came to the decision in an extraordinary meeting that was convened over the weekend.

The move had only a mild effect, with the price of most government bonds rising slightly Sunday on the Tel Aviv Stock Exchange. Inflation-linked 18-year government bonds ended 0.06% higher, trimming their yield to 0.209%. For 23-year bonds, the gain was 0.11% to a yield of 0.412%.

Unlinked bonds responded more slowly to the Bank of Israel program, but by the end of the day the 15-year bonds were up 0.11% to lower their yields to 1.524%. Nineteen-year shekel bonds were ahead 0.28% to a yield of 1.683%.

Meanwhile, share prices on the TASE closed higher for the first time in seven trading sessions, with the benchmark TA-35 index closing up 3.1% to 1,96.64 points and the broader TA-125 index up 2.7% to 1,227.46 points. Still, the index remains down 26% since its last peak just over a month ago.

The Bank of Israel said it would buy government bonds of various types and maturities in the secondary market and would also offer repo, or repurchase, transactions to financial institutions with government bonds as collateral. It also planned measures to ease bank lending.

The measures would boost liquidity in markets and increase the effectiveness of monetary policy, the central bank added.

“We are prepared for any development and will continue to take steps as needed and in line with various developments,” Bank of Israel Governor Amir Yaron said in a statement. “Monetary policy continues to be expansive and supportive of economic activity. The Bank of Israel ... has a variety of tools to support economic and financial activities in the market.”

The Bank of Israel is acting as the economic impact of the novel coronavirus begins reverberating through the Israeli economy. On Saturday evening, Prime Minister Benjamin Netanyahu announced that shopping malls, bars, hotels, restaurants and movie theaters will be closed starting Sunday, and that employees should not go to their workplaces unless necessary.

Last week the government said it would offer up to 10 billion shekels ($2.7 billion) in government loan guarantees to help businesses with liquidity crunches prompted by quarantines and other public health measures.

That said, Yaron noted that Israel’s economy is well positioned to weather the fallout of the global pandemic.

“The coronavirus has arrived when the economy is in a very good place. The strong economic data – including low debt-to-GDP ratio, current account surplus, high level of foreign exchange reserves and a robust financial system – increase the resilience of the economy to developments,” he said in the statement.

Jonathan Katz, chief economist at Leader Capital Markets, said he foresees a contraction of as much as 3% this year, with the closures to business costing up to 500 million shekels a day.

“You’re basically looking at a weak first quarter ... highly negative in the second quarter and still negative in the third quarter, and then maybe a gradual recovery in the fourth quarter.”

Noting that the central bank’s announcement it would buy government bonds did not provide numbers, Katz said it should buy corporate bonds as well.

“I see this as too little too late,” he said.

The bank did not disclose the shekel amount of government bonds that it planned to buy, nor did it set targets for the yields it hoped to achieve through the measures.

The central bank will only buy bonds trading on the secondary market, not new bonds issued by the treasury because the latter would put it in violation of the Bank of Israel Law that bars it from funding the government’s deficit.

A repo transaction involves the central bank buying bonds held by banks and other financial institutions for a predetermined time. That is equivalent to lending money to them, with the interest rate coming from the difference in the buying and selling prices of the transaction. The U.S. Federal Reserve said late last week that it would be stepping up its own repo operations.

The Bank of Israel’s next interest rate decision is scheduled for April 6, with some economists expecting a rate reduction similar to those made by other central banks such as the Federal Reserve and the Bank of England in recent days.

The last time the Bank of Israel employed quantitative easing tools was in 2009, as the global financial markets were seizing up amid a liquidity crisis. The central bank, then led by Stanley Fischer, began buying Israeli government bonds in February and by the time it ended the program in August had acquired 18 billion shekels in debt. The bank said the move enabled yields in the bond market to fall. The bank also bought foreign currency at the time.

With reporting from Reuters.