The potential for opening the negative yield gap between Israel and the US exists mainly with regard to the short-medium term against the background of the expectation of a rapid rise in interest rates in the US compared to a much slower process in Israel
The negative trend in the government bond market continued this week as well. Price declines and yields were recorded along the curves. Most of the increase in yields in the unlinked shekel channel was recorded in the medium-long part of the curve compared with increases in yields.
The negative trend in the government bond market continued this week and continues the opening of the negative year in which price declines have been recorded so far in all channels. These have lost more than 4% since the beginning of the year and completed a decline of more than 8% since the beginning of 2021. The negative trend was recorded against the background of rising global yields and probably significant redemptions in mutual funds amid renewed public risk of risky assets. World stocks are a trend that has permeated local markets this week as well.
As mentioned, in the unlinked shekel curve most of the price declines were recorded in the long part of the curve as steepness in the 2-10 year period continues to rise, in contrast to the US trend where there was a decline in steepness this week due to the relatively sharp rise in short yields. Because as long as the question marks regarding the timing of the interest rate hike in Israel continue, there will be a continued increase in the steepness of the unlinked shekel curve.
In the CPI-linked areas, the main increase in yields was recorded in the short part of the curve, which led to a decrease in short-term inflation expectations and, in fact, a flattening of the inflation expectations curve around a level of 2.65-2.70% almost along the entire curve.
We believe that the potential for opening the negative yield gap between Israel and the US exists mainly in relation to the short-term medium against the background of the expectation of a rapid rise in interest rates in the US compared to a much slower process in Israel. This is a process similar to the process in 2017-2019, when the Fed interest rate rose from its current zero level to 2.5%, compared with almost complete stability in the Bank of Israel interest rate. The negative yield differentials reached a level of over close to 2.5% over a two-year period and over 1.5% over a 5-year span.