Relatively sharp price declines were recorded in most channels, the unlinked shekel curve continued to flatten against the background of a sharp rise in yields in the short-medium part of the curve, and short-term inflation expectations continued to rise, in contrast to the TA.
A negative trend was recorded this week in trading in the government bond market. Relatively sharp price declines were recorded in the medium-long parts of the curves, with bonds with a term of 10 years or more recording close declines of close to 2.5%. Since the beginning of the year, long-term bonds with a term of 10 years or more have lost their value by more than 10%. H. Local Government.
The rise in yields in the short-medium part of the unlinked shekel curve reflects the change in attitude that has taken place in the market over the past month. The change seems to reflect a market expectation that the Bank of Israel will not be able to remain indifferent to the rise in the inflation environment and the rise in world interest rates. Support for this approach could be found in the Vice-Governor’s speech this week which argued that the crisis in Ukraine adds complexity in determining monetary policy: it creates a shock on the supply side and may delay the return of inflation to the target. These things support raising the first interest rate already in the next interest rate announcement in about two weeks.
Inflation expectations recorded an increase this week in the short part of the curve and a decrease in the medium-long part of the curve. Since the beginning of the war in Ukraine, there has been a sharp rise in inflation expectations derived as can be seen in Graph 3. In the short part of the curve, expectations have already significantly exceeded the upper limit of the price stability target and average about 4% per year. The long-term expectations that fell during the week stabilized around a level of about 3%, at the upper limit of the price stability target. Similar to the trend in a crooked world, inflation expectations fall from left to right and reflect an estimate that inflation is expected to remain high in the near term, but future interest rate hikes and monetary tightening are expected to support lower inflation, at the cost of slowing economic growth.