Israel Hedge Fund Association Annual Conference: Kotel’s Perspective on Prof. Amir Yaron’s Remarks
Yesterday, I attended the Israel Hedge Fund Association’s 12th Annual Conference, where Bank of Israel Governor Prof. Amir Yaron delivered the keynote address. When the Governor speaks, we, at Kotel, listen.
What stood out in Prof. Yaron’s remarks was not just his assessment of the Israeli economy, but the underlying story he was telling: a story of resilience, structural strength, nuance, and a financial ecosystem on the verge of meaningful evolution. As investors focused on Israel’s fixed-income markets, these themes matter deeply — not in an abstract way, but in how they shape credit spreads, yields, monetary stability, and long-term return potential.
Below is how we interpret the Governor’s message, and what it means for investors today.
1. Israel Entered The War From a Position of Real Strength
The governor underscored a point that too many headlines overlook: Israel went into the war with a fundamentally strong economy.
GDP was running above trend
The labor market was exceptionally tight
Inflation was moderating
Debt-to-GDP was at historic lows
These aren’t small details — they are the reason Israel absorbed the shock far better than typical emerging or frontier economies. Israel behaves like a developed market under stress, but with emerging-market mispricings that create opportunity.
This is a core pillar of Kotel’s thesis.
2. The Shock Was Real — But the Recovery Was Faster
The Bank of Israel estimates that economic output — as defined by GDP growth — is currently about 5% below where it would have been absent the war. Yet the contraction has been far smaller and shorter-lived than most models predicted.
Yaron put it plainly: “We have normalized an unnormal situation.”
What he means is that despite an objectively abnormal security environment — war with Hamas, Hezbollah rockets, Houthi attacks, and broader regional threats — Israelis and their markets have adapted to a new normal. Daily life and financial activity continue with striking continuity, and the economy has absorbed the shock far faster than most expected.
Evidence supports that view:
Credit-card spending is now above trend
Tax revenues remain strong
Unemployment remains near 3%
Activity rebounded far sooner than expected
Resilience is not a slogan. It shows up in the data.
3.FX Stability Is a Feature, Not a Fluke
When the shekel came under pressure on October 9, 2023, the Bank of Israel deployed its $200+ billion in reserves to ensure an orderly adjustment — but the more significant decision was what the BOI chose not to do.
They kept the FX market open.
Under severe shock like the October 7th attack, central banks could close their currency markets to foreign investors.
Israel did the opposite.
The BOI allowed markets to function, intervened aggressively but transparently, and effectively created shock absorbers: enough stability to prevent disorder, enough flexibility for the shekel to find its price.
The result:
FX markets continued to operate
International access remained intact
Volatility compressed
And within a few months, the shekel re-stabilized
This is institutional competence. It is also why Israeli fixed income behaves more like developed-market credit than emerging market credit during periods of stress.
4. Tech Remains Israel’s Growth Engine — and a Credit Anchor
Yaron’s comments on tech were telling:
Tech accounts for 16% of the workforce
Israel’s tech sector has the highest R&D-to-GDP ratio in the world
VC raised as a share of GDP remains far above U.S. levels (and glo
His line that “VC money is back in Israel” matters enormously — because for fixed-income investors, tech strength is not about valuations or IPO cycles.
It’s about credit.
A strong tech sector:
Boosts tax revenues
Supports the shekel
Anchors growth expectations
Strengthens the banking system
Lowers default risk
For a bond investor, tech isn’t a sectoral theme. It’s a macro-credit buffer.
5. Inflation Is Cooling, But Capacity Constraints Matter
September’s CPI surprised meaningfully to the downside, falling 0.6% versus expectations for a modest 0.2%–0.3% decline. That’s an encouraging signal: inflation is easing faster than economists anticipated.
But Prof. Yaron emphasized a key nuance: strong consumer demand + limited labor supply = slower, bumpier disinflation.
In practical terms, Israelis are still spending, and certain sectors continue to face worker shortages. That combination puts upward pressure on prices, even as headline inflation continues to cool.
For that reason, the Bank of Israel is staying data-driven, not calendar-driven. It will adjust policy only when the underlying numbers justify it — not simply because a certain amount of time has passed or because other central banks are moving.
For bond investors, this is constructive: a cautious, steady BOI tends to reduce market volatility, anchor long-term inflation expectations, and support a more stable yield environment.
6. The Fiscal Trilemma Will Shape the Next Decade
Israel is entering a period defined by three structural fiscal pressures — a “trilemma” that forces hard trade-offs:
Higher defense spending. The security environment has fundamentally shifted, and defense will absorb a larger share of GDP for years, not quarters. This raises baseline government spending.
Heavy investment in infrastructure & education. Roads, public transportation, housing, energy, and the education system — especially in underdeveloped communities — all require meaningful capital.
Debt-to-GDP must return to ~60%. Restoring fiscal buffers is essential for preserving Israel’s credit strength, market access, and its ability to respond to future shocks.
The BoI’s framework is clear:
Keep deficits in the low 3% range to signal discipline
Begin a downward path for debt with modest annual reductions in debt-to-GDP
Protect investment in long-term growth drivers
Fiscal credibility is not cosmetic. It is central to credit spreads, sovereign ratings, and long-term investor confidence.
7. Demography: Today’s Trends Are Tomorrow’s Problems — or Solutions
Yaron dedicated meaningful attention to demography — one of Israel’s defining long-term strengths and challenges.
Israel’s population is young and fast-growing, an enormous asset. But two communities remain under-integrated into the workforce: Haredi men and Arab women.
These groups represent both a structural headwind and an untapped opportunity.
Demography will become tomorrow’s problem — or tomorrow’s solution.
Labor-force participation trends directly affect long-term growth, fiscal sustainability, and creditworthiness. In other words: demography is macro.
8. Israel’s Financial Markets Are Innovating
Two reforms stand out:
Transition away from IBOR benchmarks to the Shekel Overnight Interest Rate (SHIR)
Shift to Monday–Friday trading from Sunday-Thursday trading
These upgrades deepen liquidity, tighten spreads over time, and integrate Israel more seamlessly with global markets — meaningful tailwinds for international investors.
Our Take: Israel’s Resilience Is the Opportunity
Prof. Yaron’s remarks align with what we see every day in Israel’s exchange-traded bond market:
A developed-market foundation
Emerging-market inefficiencies
Strong monetary and FX credibility
A resilient consumer and tax base
A long-term fiscal plan
A modernizing financial infrastructure
For global investors, that combination is rare. For us — it is the core of our investment thesis.
Israel’s economic story is not about avoiding shocks — it is about absorbing them and emerging stronger. We remain nuanced in recognizing the challenges ahead, but maintain conviction that Israel’s demonstrated resilience continues to create a compelling opportunity.
Prof. Yaron made that clear. The data makes that clear. And in our view, the opportunity is only becoming more visible.
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.
This content is for informational and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities.