Market Updates
Israeli fixed income gave back ground in September as a sharp global rise in long-term yields reached the local market. Equities were mixed, and the gap between the largest companies and the rest of the market widened further. The Bank of Israel cut rates on September 1, but the Federal Reserve raised rates on September 16. The U.S. 10-year Treasury yield ended the month at its highest level since 2002, which pushed Israeli yields higher and weakened the shekel. At month-end, attention was on the Bank of Israel’s October 21 decision and the October 27 election.
Market Performance in August
Large-cap equities rose while the broader market and bonds declined.
Israeli Equities:
TA-35: +01.6% (YTD +16.2%)
TA-90: -2.7% (YTD -3.2%)
TA-125: +0.5% (YTD +11.2%)
Israeli Bonds:
Tel-Bond 60: -0.1% (YTD +3.2%)
Tel-Bond Shekel: -0.7% (YTD +2.9%)
Tel Gov Shekel: -1.1% (YTD +2.3%)
Financials, insurers and part of the technology sector led the TA-35. They were helped early in the month by the rate cut, and their gains moderated in the second half. The TA-125’s small rise came from a handful of large constituents while most of its members fell. The TA-90 declined on weakness in real estate, energy and growth companies. Year to date, the TA-Insurance index is up about 46% and TA-Banks about 8%. Real estate is down about 10%, construction about 13% and defense about 17%. The pattern from August continued: capital is concentrating in the largest and most liquid names, and the rate-sensitive parts of the market are carrying the losses.
The rise in yields was concentrated in medium and long maturities and came despite the Bank of Israel’s cut. The 10-year government yield closed the month at 4.09%, compared with 3.87% at the end of August. That rise of 22 basis points compares with 54 basis points in the United States. Israeli government debt had held up relatively well against the global trend for several months, but in September it could not separate from the move in Treasuries. Shekel government bonds fell 1.1%. The Tel-Bond 60 was nearly flat, with its losses concentrated in longer-duration issues. Corporate spreads over government bonds widened to about 130 basis points, the widest level this year. Five-year CDS widened about 6 basis points to 59, giving back roughly half of August’s decline.
The shekel weakened 2.5% against the U.S. dollar to 3.06, as the Fed’s hike widened the rate differential with the United States. Year to date, the currency is still 4.0% stronger, which continues to hold down imported inflation.
Macro Picture
August’s Consumer Price Index rose 0.7%, slightly below forecasts of 0.8% to 0.9%. Annual inflation held at 1.5%, inside the Bank of Israel’s 1% to 3% target range. Fresh vegetables, transport, and culture and entertainment led the increase, while fresh fruit, clothing and food fell. The September 1 cut brought the policy rate to 3.25%, its lowest level since November 2022. The Bank expects inflation to move toward the 2% midpoint of its target range, and economists have raised twelve-month inflation expectations to about 2.2%. At month-end, markets did not expect a further cut at the October 21 decision.
The main driver in September came from outside Israel. In the United States, August payrolls rose by 162,000, well above expectations of about 55,000. On September 16 the Federal Reserve raised its target range by 25 basis points to 3.75%–4.00%, citing inflation that remains above 2%. The U.S. 10-year Treasury yield rose from 4.75% to 5.29% over the month. Israeli long-term yields have followed Treasuries only partially, but they have followed.
The fiscal picture has improved through the year. The deficit for the twelve months to August narrowed to 3.2% of GDP, as tax revenue grew well ahead of spending. The Ministry of Finance expects spending growth to pick up in the coming months. For bond investors, the composition of the next coalition matters less after the October 27 election than the fiscal path it adopts. Coalition formation in Israel typically takes weeks, and the formal mandate period alone runs up to six weeks, so uncertainty may extend toward year-end. The next government will set the 2027 budget starting from these figures.
Taken together, September showed that Israeli fixed income is not insulated from a global repricing of long-term rates, even while domestic monetary policy is easing. The underlying domestic conditions were unchanged by the month: inflation is inside the target range, the deficit has narrowed through the year, the investor base is largely domestic, and the sovereign risk premium is close to its pre-war level. The main questions for the fourth quarter are the path of U.S. long-term yields and the fiscal course set after the election.
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