October 2025 Market Insights: Hostage Release and Renewed Optimism
Market Updates
October was marked by renewed optimism in both global and local markets, driven by the announcement of a ceasefire agreement and the return of all living hostages from Gaza. Investor sentiment strengthened sharply, leading to notable gains across equities and bonds. Geopolitical optimism was further buoyed by President Trump’s 21-point Middle East framework, which markets interpreted as a potential roadmap toward regional stabilization and expanded economic cooperation.
Following the ceasefire, the Israeli bond and equity markets strengthened significantly, reflecting improved risk sentiment and confidence in fiscal stability:
Market Performance in October
Israeli Equities:
TA-35: +2.3% (record high)
TA-125: +2.7%
TA-90: +4.0%
Israeli Bonds:
Tel-Bond 60: +0.7%
Tel-Bond Shekel: +1.2%
Macro Picture
Israel’s Consumer Price Index (CPI) for September surprised with a sharp decline of 0.6%, well below forecasts calling for a decrease of just 0.2%–0.3%. As a result, annual inflation fell to 2.5%, with projections now pointing toward ~2% over the next 12 months. The main factor behind the decline was lower flight prices, which are expected to continue weighing on the index in the coming months.
This convergence of inflation toward the Bank of Israel’s 1%–3% target range paves the way for the first interest rate cut in nearly two years — potentially as early as November. Our earlier assessment that inflation would moderate later this year now appears to be materializing, creating room for monetary easing in the near term.
The 10-year Israeli government bond yield declined to 3.88% (from 4.10% in September), continuing to trade below its U.S. counterpart and signaling confidence in Israel’s fiscal resilience. The five-year CDS spread narrowed from 73.05 to 70.56 bps (-3.4%), returning to levels only slightly above those seen before the Iron Swords war.
The shekel appreciated sharply, strengthening from 3.306 → 3.243 USD/ILS over the month. This currency strength — alongside a stable labor market and rising domestic supply — should support continued disinflation in coming months.
Regarding interest rates, consensus now points to a 0.25% rate cut at the Bank of Israel’s next policy meeting on November 24, though officials have emphasized that no decision will be made before that date.
On the sovereign and credit front:
Moody’s reaffirmed Israel’s Baa1 rating (negative outlook) but raised its 2025 growth forecast to 2.5% (from 2.0%) and projected 4.5% growth in 2026, noting that the ceasefire represents a positive step for Israel’s credit outlook.
Fitch upgraded its outlook for Israel’s five largest banks from negative to stable, citing strong financial resilience and reduced geopolitical risk, while maintaining A- ratings.
Together, inflation moderation, shekel strength, and narrowing yield spreads reinforce a picture of macroeconomic resilience and renewed investor confidence — a foundation that supports Kotel’s constructive positioning in Israeli fixed income.
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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