August 2026 Market Insights: Sectors Diverge, Bonds Steady

Market Updates

Israeli equity indices ended August slightly lower. The small headline moves hid the widest dispersion between sectors this year. Fixed income was steady, with government bonds recovering part of July's losses, and the shekel strengthened. Toward month-end, rising U.S. yields and renewed escalation with Iran turned sentiment negative. The Bank of Israel cut rates again on September 1, and attention is shifting toward the October 27 election and its fiscal implications.

Market Performance in August

Equities declined broadly, while bonds held their ground.

• Israeli Equities:

  • TA-35: -0.3% (YTD +14.4%)

  • TA-90: -1.0% (YTD -0.5%)

  • TA-125: -0.4% (YTD +10.7%)

• Israeli Bonds:

  • Tel-Bond 60: +0.3% (YTD +3.3%)

  • Tel-Bond Shekel: +0.5% (YTD +3.7%)

  • Tel Gov Shekel: +0.6% (YTD +3.4%)

Sector moves were large. On earnings, insurance rose about 11% and banks about 6%. Defense fell about 15%, technology more than 6%, and cleantech and renewables about 10%. The TA-90 is now negative for the year while the TA-35 is up about 14%. That gap reflects index composition rather than company quality. The TA-35 is concentrated in financials and large international businesses. The TA-90 carries more real estate, construction, energy, infrastructure and mid-sized technology, all of which are more sensitive to interest rates, financing costs and domestic sentiment. When flows thin out, capital concentrates in the largest names first.

Fixed income was steady, with the government segment recovering part of July's losses. The 10-year government yield, measured on a monthly-average basis, was 3.91%, compared with 3.88% in July. Strong growth data tempered expectations of an immediate rate cut, so the curve did not rally. Even so, shekel-denominated nominal government bonds outperformed, while long CPI-linked bonds were flat. Corporate spreads stayed tight. Five-year CDS fell 11 basis points to about 53, back to its September 2023 level and retracing July's widening.

The shekel strengthened approximately 2.3% against the U.S. dollar to 2.99. That reversed most of July's decline and left the currency up 6.3% year to date.

Macro Picture

July's Consumer Price Index rose 0.3%, in line with expectations. Annual inflation eased to 1.5%, the lowest since May 2021. Second-quarter GDP grew at a 15.4% annualized rate, but two factors inflate that figure: the rebound from the first-quarter contraction, and overseas hardware production booked through an Israeli-registered subsidiary. Underlying domestic growth is closer to 3–4%. On September 1, the Bank of Israel cut rates by 25 basis points to 3.25%. This was its third consecutive cut and its fifth since November. Its staff forecast continues to point to a rate of about 3% by mid-2027.

The main risk for the coming months is fiscal and political rather than monetary. Israel holds elections on October 27. The Bank of Israel forecasts a 2026 deficit of 4.9% of GDP and debt near 69%, while Moody's puts the deficit closer to 5.3%. Defense spending is approaching 8% of GDP, and a further NIS 25 billion increase is under discussion. The coalition that emerges will set the 2027 budget against these figures, and its composition may not be known until December. The most likely routes to higher long-term yields and wider spreads in the fourth quarter are pre-election fiscal loosening or a prolonged coalition negotiation.

New issuance remained scarce through August, limiting one of the main channels through which active local managers generate returns. Early September has brought signs that the market is reopening. Separately, the Tel Aviv Stock Exchange's new liquidity requirements for the Tel-Bond indices took effect with the August 27 rebalancing. The immediate flows are small, but the change should gradually improve price discovery in the less-traded parts of the market.

Taken together, August's flat index returns hid large sector moves driven by earnings, rates and flows. Meanwhile, bonds and the shekel both recovered much of July's weakness. Inflation continues to ease and the Bank of Israel has continued to cut. The main uncertainty ahead is the fiscal path set after the election, not the direction of monetary policy.

About Kotel Investment Management: We serve as a bridge between U.S. capital and Israel’s overlooked fixed income markets, sharing insights and perspective through our research and thought leadership.

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