Foreign Investors Flock to Israeli Bonds Amid Global Volatility
Translated & summarized from Ice by baba
Foreign investors are buying NIS 2-3 billion daily in Israeli government bonds, more than half the market's turnover, due to the market's resilience amid global volatility. This activity is driving down yields to around 3% in Israel, contrasting with rising yields in the U.S. due to higher inflation and interest rates there. Israel's moderating inflation, low deficit, and projected growth support its bond market, creating a significant yield gap with U.S. Treasuries.
The story in 5 lines · by baba
- Foreign investors are purchasing NIS 2-3 billion daily in Israeli government bonds, representing over half the market's turnover.
- Israel's government bond market shows resilience with yields around 3%, contrasting with rising U.S. bond yields.
- Moderating inflation in Israel is within the 1%-3% target, while U.S. inflation remains higher at 3.5%-4%.
- The U.S. Federal Reserve recently raised interest rates, while Israel's central bank rate is lower at 3.25%.
- The yield on a ten-year Israeli government bond is just over 4%, compared to about 5.1% for its U.S. counterpart.
Despite global government bond market turmoil, with yields on long-term U.S. debt reaching unusual highs, Israel's government bond market is showing surprising resilience. This strength is attracting significant foreign investment, with foreign buyers purchasing approximately NIS 2 to 3 billion daily in short-term shekel-denominated government bonds and Treasury bills. This volume represents over half of the total trading turnover in Israel's government bond market, a level not seen since the era of zero interest rates, according to Eyal Wisblum, Investment Manager at Migdal Capital Markets.
The high demand is pushing yields down in these segments to around 3% or less. Wisblum attributes the divergence between the Israeli and U.S. bond markets to a combination of international trends and differing economic conditions. While foreign countries have been selling U.S. debt, increasing pressure on its prices and yields, Israel is experiencing moderating inflation that has returned within the Bank of Israel's target range of 1%-3%. In contrast, U.S. inflation remains stubbornly high, between 3.5%-4%, influenced by rising housing, food, and energy prices amid regional tensions.
The U.S. Federal Reserve's response to inflation has also impacted its bond market. Contrary to earlier expectations of rate cuts, the Fed recently raised its interest rate by 0.25 percentage points to a range of 3.75%-4%, with the possibility of further increases. Meanwhile, Israel's economic picture shows positive signs despite the ongoing war, including lower-than-expected government deficits, low unemployment, and projected rapid economic growth for 2027. The Bank of Israel's interest rate stands at 3.25%, lower than the U.S. rate.
These contrasting economic conditions are reflected in long-term bond yields. While U.S. ten-year Treasury yields have risen sharply to about 5.1%, the equivalent Israeli government bond yield is just over 4%. Wisblum notes this significant yield gap, over a full percentage point, is unusual given the U.S. economy's size and Israel's security situation, suggesting that without knowing the countries involved, one might struggle to believe these yield figures represent the U.S. versus Israeli markets.
