May 2026 Market Insights: Shekel Strength and Easing Rates Drive Markets Higher

Market Updates

Israeli markets delivered another strong month in May, though the path was far from smooth. Markets remained highly sensitive to developments surrounding negotiations between the United States and Iran, with investors attempting to assess whether diplomacy would prevail or whether another round of military escalation remained likely. Despite this uncertainty, growing optimism surrounding a potential agreement, combined with a 25-basis-point rate cut by the Bank of Israel, provided a supportive backdrop for risk assets.

Market Performance in May

The compression in Israel's risk premium continued throughout the month, supporting both equities and bonds.

• Israeli Equities:

  • TA-35: +1.9%

  • TA-90: +5.0%

  • TA-125: +2.7%

• Israeli Bonds:

  • Tel-Bond 60: +1.5%

  • Tel-Bond Shekel: +0.8%

Unlike the broader global fixed income environment, Israeli bonds benefited from improving domestic conditions. Government bond yields declined throughout the month as investors responded positively to the Bank of Israel's rate cut, continued shekel strength, and improving sentiment toward Israeli assets. The yield on Israel's 10-year government bond declined to approximately 3.74% by month-end, compared to roughly 4.00% at the end of April.

In addition, the Israeli shekel strengthened a further 4.6% against the U.S. dollar, ending the month near 2.81 ILS/USD and continuing to demonstrate resilience despite the challenging geopolitical backdrop.

Macro Picture

Israeli financial markets performed strongly during May as improving geopolitical sentiment and the Bank of Israel's first rate cut since January supported both equity and fixed income markets. Investor optimism surrounding a potential U.S.-Iran agreement contributed to further compression in Israel's sovereign risk premium and improved risk appetite across local markets.

Inflation remained well contained within the Bank of Israel's target range, while continued strength in the shekel helped moderate imported inflation pressures. Supported by these developments, the Bank of Israel lowered its policy rate by 25 basis points to 3.75%, signaling increased confidence in the inflation outlook and domestic financial conditions.

Israeli fixed income markets benefited from the improving backdrop. Government bond yields declined meaningfully during the month, with the 10-year government bond yield falling from approximately 4.00% at the end of April to roughly 3.74% by month-end. Corporate bonds also performed well as investors continued to rotate into risk assets amid improving sentiment.

In foreign exchange markets, the shekel continued its impressive appreciation, gaining approximately 4.6% against the U.S. dollar during May. The currency was supported by declining sovereign risk premia, institutional hedging flows, favorable interest-rate differentials, and continued foreign investment activity.

Taken together, moderating inflation, lower government bond yields, easing monetary policy, and continued shekel strength created a supportive backdrop for Israeli fixed income markets during the month.

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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