Israel’s risk premium fell last week to its lowest level in three and a half years, a sign of improved perceived financial resilience. The article explains the concept as a weekly economics explainer published by Globes in cooperation with the Center for the Empowerment of the Citizen, under a section that tracks government decisions and legislation.
A risk premium is the extra return investors demand on loans and bonds, beyond the yield on a so-called risk-free asset. In practice, one common benchmark is U.S. government bonds, which are seen as very low risk. Another major way to measure a country’s risk premium is through CDS contracts, or credit default swaps, which function like insurance against a borrower’s default.
In this framework, banks and large financial institutions sell CDS protection to bond investors, who pay a periodic premium. If the bond issuer defaults, the CDS seller compensates the holder for interest and principal. A rising CDS price signals greater fear that a government will fail to meet its obligations, while a decline suggests the investment is considered safer.
The article says risk premium is one of the key indicators examined in monetary policy decisions and, like credit ratings, reflects the borrower’s financial stability. Changes can affect how foreign and domestic investors allocate between foreign currency and local currency assets, which in turn can influence exchange rates and even prices in the economy. The topic entered mainstream public debate mainly after the current government was sworn in, when Israel’s risk premium began rising and later peaked after October 7. The previous major drop came in October, after the agreement to return the hostages and end the fighting in Gaza.
