The cancellation of non-tradeable bonds should support tradeable assets

ISRAEL - In Brief 04 Sep 2022 by Jonathan Katz

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Non-tradeable bond issuance will cease on the 1st of October. • Although this will require higher tradeable bond issuance (an additional 35bn annual) in order to meet fiscal financing requirements, the current positive fiscal situation (currently a surplus) will support low issuance. • Domestic demand for this increase in issuance could be less than 35bn as pension funds diversify their assets, in part to equity and corporate bonds. • Higher bond issuance will increase the liquidity and depth of the bond market, which will likely encourage foreigners to be more active in the bond market. • Pension funds will likely prefer the long end of the sovereign curve in order to maintain their long duration (non-tradeable bonds are issuance for 15 years). Pension funds will also diversify more into equity and corporate bonds. • In the long run, the MoF is likely to save 4-5bn on interest payments annually, once non-tradeable bonds disappear. The bond market: A fairly hawkish BoI gives assurance that inflation in coming years will come down to 2% if not lower. We could see an inverted curve by-end year. This should be positive for the long end when markets sense that the tightening cycle is coming to an end. Private consumption slows due to inflation: Real (domestic) credit card purchases remained stable in May-July following growth of 3.7% in the previous three months. Real chain store sales actually improved, up 1.3% saar in May-July following a decline of 0.3% in the previous three months. Low inflation in August-September should support household spending. Wages remained stable in June and are up 3.2% y/y So far, wage growth has been concentrated in the hi-tech sectors. A wag...