US Bond Yields Surge, Euro Weakens, While Israel Shows Resilience

Global bond yields are beginning to impact the world economy, with the Euro falling to a nearly 18-month low of $1.11 against the dollar. This decline is largely attributed to high oil prices fueling inflation, which in turn keeps bond yields above 5%, straining the global economy. As the world enters the final quarter of 2026, US bond yields remain exceptionally high. However, Israel has managed to partially decouple from this trend. The yield on 10-year US Treasury bonds reached approximately 5.25% at the end of the week, compared to about 4.14% for the equivalent Israeli government bond, a gap of roughly 1.1% favoring Israel. This spread has widened rapidly in recent months, with the Israeli 10-year yield rising about 0.25% in September and 0.4% in the third quarter, while US yields saw sharper increases of 0.53% and 0.81% respectively during the same periods.

Yossi Menashe, founder and co-CEO of Altshuler Shaham Financial Services, described the gap between the Israeli and American bond markets as one of the most interesting stories in the markets. He attributes Israel's relative stability to inflation being at the lower end of its target, moderate inflation expectations, and a better-than-expected fiscal situation. These factors provide relative support for local bonds. Leader Capital Markets estimates Israel's deficit for the year could be around 4% of GDP, below the 4.6% target, due to higher-than-expected tax revenues and lower-than-expected expenditures. They also note that the negative yield spread between Israel and the US is at a historically high level. Inflation forecasts for Israel in the coming year are around 1.9%-2.2%, with Bank Hapoalim projecting 2% inflation and a Bank of Israel interest rate of 3.25% in the near term.

Despite Israel's relative strength, the rise in global long-term yields is effectively tightening financial conditions in Israel, even if the local interest rate isn't increasing. In the US, the situation is more complex. September's employment report showed only 29,000 new jobs, far below the expected 90,000, and annual wage growth slowed to 3%. Consequently, the probability of an October interest rate hike dropped to about 20% from 70% earlier in the week. However, this decrease in rate hike expectations did not significantly lower long-term yields, with 30-year US Treasury yields reaching about 5.62%, 10-year yields around 5.27%, and 5-year yields near 5.02%. Factors contributing to this include a high fiscal deficit, large issuance volumes, energy prices, and concerns that inflation will remain elevated.

Menashe also noted the Israeli Shekel's relative resilience despite global dollar strength and rising energy prices. He believes that as long as US long-term yields remain high, they will continue to be a major factor influencing stock, foreign exchange, and bond markets in Israel.