Benchmark bond yield jumps after S&P rating cut, Syria attacks

Israeli government bonds fell on Sunday, lifting the yield on the benchmark 10-year debt the most in almost nine months, after Standard & Poor’s cut the country’s rating and amid reports Israel attacked targets in Syria.

The yield on the 4.25 percent notes due March 2023 rose 11 basis points, or 0.11 percentage point, the most since August 13, to 3.62% at the close in Tel Aviv. The rate tumbled a record 39 basis points in April. The benchmark TA-25 Index of stocks fell 0.1%.

Standard & Poor’s late on Thursday cut the country’s currency rating to A+/ A-1 from AA-/A-1+ citing “recent fiscal slippage” and a 2013 budget deficit larger than last year’s. The cabinet on Sunday agreed to raise the 2013 deficit target to 4.65% of gross domestic product from a planned 3% and to increase the limit for 2014 to 3% from the planned 2.75%.

“The big diversion from the target is rightly raising concern about fiscal responsibility also from foreign rating agencies,” Moshik Yaniv, the head of the local fixed-income desk at Migdal Capital Markets Ltd. in Tel Aviv, said Sunday by phone. “The proposal puts into question the new government’s ability to meet its fiscal targets by making the necessary budget cuts.”

The S&P downgrade came hours after Finance Minister Yair Lapid’s initial proposal to raise the deficit to 4.9% was reported. He backpedaled following the downgrade and criticism from analysts. The government is facing a NIS 16 billion “hole” in the budget as its revenue forecast failed, Lapid said last Wednesday.

Tough task

Fitch Ratings Ltd., which on April 25 affirmed Israel’s A rating, last week said the proposed deficit is above forecast and will make it tougher for the government to reduce the debt-toGDP ratio. The ratio fell to 73.2% in 2012 from 74.1% in 2011, the Finance Ministry said Wednesday.

Bank of Israel Governor Stanley Fischer has urged the government to cut the gap because it is essential for continuing to reduce the public debttoGDP ratio. The budget deficit almost tripled in the first quarter to NIS 4.6b.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixedrate corporate bonds, dropped for the first time since April 24, retreating 0.4% to 288.53. The shekel strengthened for a 12th day on Friday, adding 0.4% to 3.5549 per dollar and capping the longest stretch of daily gains since at least April 1981, when Bloomberg started compiling data.

Prime Minister Binyamin Netanyahu called early elections in October after concluding he would not win government approval for the budget cuts necessary to reach the 3% deficit target. The Knesset has less than three months to approve the spending plan. (Bloomberg)