Are the New Tel-Bond Liquidity Rules a Step Toward a More Mature Market?
One of the quieter changes taking place in Israel's capital markets this month is a new set of liquidity requirements for the Tel-Bond and All-Bond indices.
Beginning with the August 27 rebalancing, a corporate bond's eligibility will depend not only on characteristics such as its size, rating and maturity, but also on whether it trades consistently enough to meet the Tel Aviv Stock Exchange's new liquidity standards.
The projected immediate effect is meaningful but modest. In a late-July simulation, the TASE identified 87 bond series issued by 49 companies that did not meet the new criteria. It estimated that approximately NIS 725 million — about 1.6% of assets tracking the affected indices — could move out of those bonds if their status remained unchanged by the August 10 record date. That matters in the context of approximately NIS 53 billion currently tracking the Tel-Bond and All-Bond indices.
This will not transform Israel's corporate bond market on its own. But it raises a worthwhile question: Do more demanding liquidity standards represent a constructive step in the market's continued maturation?
My initial view is that the reform is directionally positive, but incremental. Its significance lies less in one rebalancing than in the incentives it may create over time — for index providers, issuers and investors.
What is changing?
The primary test is median daily turnover over a 180-trading-day period. Using the median reduces the influence of a few unusually active days and asks whether a bond trades with some consistency.
The TASE has also established higher thresholds for entering certain indices than for remaining in them. For example, a bond needs median daily turnover of NIS 2 million to enter the Tel-Bond 20, but NIS 1 million to remain. Both the Tel-Bond 40 and Tel-Bond Shekel 60 use NIS 1 million for entry and NIS 500,000 for retention. This type of entry-and-exit buffer can help prevent securities from repeatedly moving in and out of an index because of small changes in turnover.
Turnover is still an imperfect measure of liquidity. It does not tell an investor how much can be bought or sold at a quoted price, how wide the bid-ask spread is or how much a larger order would move the market. It may also favor recently issued bonds that are temporarily active. But it is observable and relatively straightforward to apply across an exchange-traded bond market.
The reform therefore does not solve the liquidity question. It gives the indices a clearer minimum standard.
Why liquidity belongs in index design
An index is not merely a list of securities that satisfy formal requirements. If investors are going to allocate capital to products that track it, the index also needs to be reasonably investable in practice.
That distinction is especially important in bonds. A security can qualify based on rating, issue size, maturity or linkage while still trading infrequently. If a tracking fund must buy or sell a bond for which there is little available supply or demand, the fund may move the price simply by trying to follow the benchmark. That can raise execution costs and create a larger gap between the index's published return and what investors in a product tracking it actually receive.
A benchmark made up of more consistently tradable securities should be easier to replicate. It may also produce prices that more reliably reflect current market information rather than an old transaction in a bond that rarely trades.
That does not necessarily make the index more representative of every bond in the market. It makes the index more usable for the purpose of investing real money against it. Those are related — but distinct — objectives.
The difference between meeting the standard and being liquid
The most important caveat in the reform is the gap it leaves between satisfying the liquidity requirement and actually being liquid.
The rules give issuers a way to respond to the new standards through market making. A bond series with less than 180 days of trading history may appoint a market maker to shorten the waiting period for index eligibility, and the TASE has noted that companies failing the requirements can take steps to improve their bonds' liquidity — including appointing a market maker — before the record date.
A market maker here is a TASE member that regularly posts both a bid and an ask in a series, subject to obligations such as a maximum spread, a minimum quote size and a required amount of time in the market. That is genuinely useful: an investor should not always have to wait for a natural counterparty to appear before being able to trade.
But it means a bond can satisfy the index's standard through contracted quotes rather than demonstrated trading. Market-maker-supported liquidity is not the same as deep, organic demand. A market maker does not guarantee heavy trading, prevent prices from falling or ensure that a large position can be sold easily during stress. If the reform succeeds, it will be because it produces persistent two-way markets and real trading depth — not because the affected series formally comply. The quality and durability of the quotes will matter more than compliance alone.
Why issuers should care about secondary liquidity
At first glance, an issuer may view trading after a bond offering as primarily an investor concern. The company has already raised its capital. Why should it care how often the bond changes hands?
Because today's secondary market can influence tomorrow's financing terms.
Investors generally require compensation for owning a security that may be difficult to sell. If a bond trades more reliably, the liquidity premium embedded in its yield may be lower. Index eligibility can also broaden the potential buyer base by adding demand from benchmark-tracking products. And a reasonably liquid existing bond curve gives investors a clearer reference point when the issuer returns to the market.
This does not mean every company should issue more debt simply to create a larger series, or that every issuer should pay for a market maker. It means issuance size, fragmentation across several series, index eligibility and secondary-market support can reasonably form part of an issuer's debt-capital-markets strategy.
Over time, the new rules may encourage some companies to issue larger series, consolidate smaller ones or support more consistent trading. If that occurs, the benefit would extend beyond index composition: it could make the market easier for both issuers and investors to navigate.
Is "any shakeup" good for a slow market?
When I asked one experienced Israeli bond trader about the change, his concise reaction was: "Any shakeup is good."
I took that less as a prediction of a major dislocation and more as a comment on market activity. Recently, the market has been relatively slow, so even a modest rebalancing can generate buying and selling, make prices more observable, and give market participants a reason to reassess relative value across securities.
There is a useful distinction, however, between activity and liquidity. A burst of turnover around August 27 would not prove that the affected bonds had become easier to trade on an ordinary day — or during a period of stress. The healthier outcome would be more persistent two-way markets and more informative prices after the rebalancing has passed.
Could this help produce a more competitive and differentiated credit market?
A recurring concern in discussions of Israeli corporate credit is that the market does not always distinguish sharply enough among issuers — and that some borrowers can raise capital at yields that appear low relative to their underlying credit quality.
That claim requires care. Comparing Israeli and global corporate bonds using headline yields alone can be misleading. Government curves, duration, currency, security, covenants, liquidity and rating frameworks all differ. The proper comparison is closer to an adjusted credit spread than to the stated yield on two bonds.
Still, there is reason to take the broader concern seriously. Bank of Israel research using data from 2007 through 2020 identified periods in which actual corporate-bond spreads deviated from spreads predicted by fundamental factors. It also found that rapid mutual-fund inflows could reinforce those deviations when spreads were already lower than fundamentals would suggest.
The new TASE rules do not directly solve that problem. They sort bonds by tradability, not by the issuer's ability to repay. A less-liquid bond can be an excellent credit, while a highly liquid bond can still be mispriced.
The more plausible benefit is indirect. Better liquidity can support more frequent trading and more informative price discovery. Reducing automatic benchmark demand for bonds that do not meet a minimum trading standard may also leave more of their pricing to investors making an active decision to own them. Over time, that could contribute to a more differentiated market in which liquidity and credit risk are each priced more explicitly.
That would be a healthy form of stratification. It could make the market more credible and competitive by requiring issuers to compete not only on access to local demand, but also on credit quality, structure and tradability.
But the outcome is not guaranteed. The reform could instead create a simple divide between large benchmark issuers and smaller off-index borrowers. Some sound companies may face higher financing costs because their bonds are less liquid, even if nothing has changed in their creditworthiness. In one sense, that is the market charging a liquidity premium. In another, it may make public bond financing less economical for smaller issuers.
The distinction is important: better pricing of liquidity risk would be a direct and intended result; better pricing of credit risk would be a possible second-order benefit.
What should we watch?
The August rebalancing may create selling in specific securities for reasons unrelated to credit fundamentals, but the aggregate figures should not be exaggerated. The TASE's NIS 725 million estimate represents only 1.6% of assets tracking the affected indices. It is a simulation, not a guarantee of one-for-one forced selling or material price changes in every affected bond.
The more useful test will come over the following months:
Do bid-ask spreads and trading depth improve within the affected indices?
Do index-tracking products face lower execution costs or smaller tracking differences?
Do appointed market makers provide useful liquidity beyond the minimum requirement?
Do issuers change the size or structure of future offerings in response?
Does the market become better at distinguishing liquidity risk from credit risk?
Do international and institutional investors find the benchmarks more accessible?
Do sound, smaller issuers retain reasonable access to capital outside the major indices?
These questions will tell us more about the reform than the price action surrounding a single rebalance.
A constructive, incremental step
A mature bond market does not require every security to be equally liquid or included in a major index. It does require credible benchmarks, transparent rules and a market capable of distinguishing among interest-rate risk, credit risk and liquidity risk.
Viewed through that lens, the Tel-Bond reform appears to be a constructive step. It should make the indices more reflective of what investors can realistically trade, and it may encourage issuers to pay more attention to how their bonds function after issuance.
Its limitations are equally clear. Turnover is an incomplete measure. Market making cannot manufacture natural demand. And liquidity standards alone cannot correct the underpricing of credit risk.
The reform's significance is therefore modest but real. It is not a transformation of Israel's bond market. It is a refinement to the market's infrastructure — and a useful test of whether better benchmark design can contribute to a more investable, differentiated and mature market over time.
Sources: TASE corporate-bond index liquidity reform; TASE July 2026 market review; TASE market-maker background; Bank of Israel research on corporate-bond spreads.
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