Why Israel’s Bond Market Deserves a Closer Look

When global investors think about Israel, they usually picture a thriving technology sector, a strong entrepreneurial culture, an outsized role in cybersecurity and defense, and — regrettably — unfavorable headlines.

Yet one of Israel’s most important and overlooked assets is hiding in plain sight: its bond market.

A Developed, Global Market with Local Inefficiencies

Israel’s corporate and government bonds trade on the Tel Aviv Stock Exchange in a fully transparent, exchange-driven system. Prices are public, flows are visible, and liquidity is centralized. For investors used to the opaque, dealer-driven world of U.S. corporate bonds, this alone is a striking difference.

In the U.S. and nearly every other major bond market, corporate bonds trade over-the-counter (OTC), where transactions are brokered through dealers — creating fragmented price transparency and wider bid-ask spreads.

But transparency doesn’t mean efficiency. Israel isn’t an emerging market, but its structure creates dynamics that feel unconventional compared to other developed markets:

• Concentration of local institutions → A handful of large players dominate flows, moving markets disproportionately.

• Rule-based flows → Index rebalancing and regulatory mandates often create predictable but sharp price dislocations.

• Fragmented issuance → Companies issue multiple small bond series, adding complexity and relative-value gaps.

• Home-market bias → Foreign ownership sits in the single digits, so pricing is driven almost entirely by domestic institutions allowing inefficiencies to persist longer.

These dynamics leave plenty of room for mispricings — and opportunities for active managers who understand the local context.

Low Correlation, High Diversification

For international investors, Israel’s bond market offers something rare: genuine diversification. Historically, Israeli bonds have shown low and inconsistent correlation with U.S. fixed income benchmarks. Since 2009, the correlation between the Tel-Bond 60 (representative benchmark of Israel’s bond market) and the Bloomberg U.S. Aggregate Bond Index (AGG) has been just 0.31 — a low positive correlation that underscores the structural diversification benefit over the long run.

A Market Built on Strong Foundations

Despite wartime pressures and headlines that often focus on risks, Israel’s fundamentals remain robust:

• Interest burden (interest payments as % of GDP) lower than the U.S. and OECD average

• Debt-to-GDP well below the OECD average

• Over $200 billion in foreign exchange reserves

• Strong global demand for Israeli government debt

Headlines often shape Israel’s perception, but context tells the fuller story: beneath the noise, the country maintains the financial resilience of a developed market.

This isn’t a fragile market. It’s a resilient one with room to maneuver and a track record of adapting.

Why Now

As global allocators search for genuine diversification and uncorrelated strategies, Israel’s bond market deserves a closer look. It combines the strengths of a modern, developed exchange with the inefficiencies of a market still overlooked by most international investors.

For those willing to look beyond the headlines, the opportunity is clear: Israel’s bond market is not just a local story. It’s a global one.

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.