How record-breaking bond offering is part of Israel’s strategy to fund gov’t

Israel raised eight billion dollars in bond sales, setting a record with the highest-ever demand for an Israeli international bond offering, the Finance Ministry’s Accountant General’s office announced on Wednesday. Demand for the offering, launched on Tuesday, reached $38 billion, and some 400 investors from 36 countries participated, the ministry added.

The bonds were sold as part of the Finance Ministry’s strategy to fund the government’s activity as the Israel-Hamas war continues to impact Israel’s economy.

Selling bonds allows Israel to raise money to cover current budgetary needs by essentially borrowing money from those who buy the bonds. A government bond represents a debt owed by the government to the person who buys the bond. The government must repay that debt in the specified time frame and interest to the buyer. Thirty-year, ten-year, and five-year bonds were sold in the issuing.

The bond offering results showed that Israel would pay 135 basis points over comparable 5-year US Treasuries, 145 basis points over 10-year Treasuries, and 175 basis points over US 30-year bonds. This means that Israel will pay higher interest rates than comparable US bonds issued over a similar time frame.

Smotrich and Rothenberg celebrate change in bond sales

Rothenberg and Finance Minister Bezalel Smotrich celebrated the record-breaking debt issuance, pointing to the high demand as an important expression of foreign investors’ faith in Israeli markets. This expression follows a tumultuous time for Israel’s economy, as government bonds have underperformed the most widely-followed global emerging market bond index by just over ten percentage points over the last six months, along with Moody’s cut Israel’s credit rating last month.

Moody’s downgraded Israel’s credit rating to “A2” from “A1” in early February, citing material political and fiscal risks for the country due to its war with Hamas.“While fighting in Gaza may diminish in intensity or pause, there is currently no agreement to end the hostilities durably and no agreement on a longer-term plan that would fully restore and eventually strengthen security for Israel,” Moody’s said at the time.

This lower credit rating is an indication of a higher risk of investing in Israeli securities. This risk impacts the interest paid for Israeli bonds. A higher-risk investment pays a higher interest to compensate investors for this risk.

According to Accountant General Yali Rothenberg, the majority of similar bond offerings will be on local markets, such as in shekel bond sales. These offerings may also impact inflation in Israel. When Israelis buy bonds, it reduces the amount of money in circulation in the Israeli economy and so may slow inflation.

Israel’s inflation was above the target rate when the war began, but currently, Inflation is moderated and stands at 2.6%,” said Bank of Israel Governor Amir Yaron on Tuesday. “Expectations for inflation for the coming year have risen slightly. Uncertainty still prevails regarding the effects of the war on inflation processes,” he added.