Against the background of the rise in the inflation environment, the rise in world yields and the expectation of monetary tightening, there was a decline of more than 4% in the general government bond index during the quarter.
A positive trend was recorded this week in the trading of the government bond market after several weeks of price declines. Price increases were recorded along the medium-long sections of the curves with bonds of 10 years or more recording average price increases of close to 2.0% during the week. Government bonds rose by an average of 0.70%, and short-term index-linked bonds fell by an average of 0.40%.
Yields were also recorded at 1 a year in the wake of a statement by the Governor of the Bank of Israel regarding the change in the inflation environment, which requires the Bank of Israel to rethink the need for more interest rate hikes. Apparently, in the first phase with a symbolic increase relative to the level of 25 basis points, while later in the current year, another 2 interest rate increases of 25 basis points are expected. It is not inconceivable that the Bank of Israel will act at the beginning of the process to move interest rates faster, while the interest rate reaches 1.0-1.5% within a year and then stabilize.
The continuation of the excess performance in the medium-long parts of the curves led to the continuation of the trend of flattening mainly in the range of 2 – 10 years. The steepness in the range of 2 – 10 years, in the unlinked shekel curve, which stood at about 115 bp at the beginning of the year, decreased during the first quarter to a level of about 80 bp. Another decrease was recorded in the range of 10 – 30 in the shekel curve, where the steepness decreased during the quarter from about 130 bp, at the beginning of the quarter, to below 100 bp today.
Inflation expectations have declined this week almost along the entire curve, except for the longest part. The fall in commodity prices this week and the expectation of a faster-than-expected rate hike in Israel supported this trend.
The first quarter of the year was one of the worst quarters in years for the government bond market. Against the background of rising inflation, rising world yields and the expectation of monetary tightening, the general government bond index fell by more than 4% during the quarter. Bonds with a term of 10 years or more were lost during the quarter by an average of 9%.