Daily Times

TEL AVIV: Investment bank Citi is expected to include Israel in its influential World Government Bond Index in coming months, a boost for the local bond market but a potential headache for the central bank as it fights to contain the surging shekel.

An estimated $3 trillion of assets track Citi’s index (WGBI). Israel would account for less than 0.5 percent, but it nonetheless could mean an influx of up to $4 billion of foreign money.

That may add to the appreciation of the shekel, which is already near a 15-year high versus the euro, a 2-1/2 year peak against the dollar and its strongest level ever against a basket of foreign currencies.

Further strengthening could be a big problem for a trade-focused economy like Israel’s.

Israel is now $1-$2 billion short of the $50 billion index eligibility threshold for outstanding government bonds, a gap Citi’s analysts believe will close within a few months.

An analysis this month from Bank of America Merrill Lynch said inclusion could come as early as June, while Citi emerging markets strategist Luis Costa estimates 5-6 months. “The fact that there would be more demand for Israeli securities is a good thing. It will help liquidity, tradability of the securities … it could lower the yields needed to issue government bonds,” said a senior Israeli government official, who spoke anonymously due to the issue’s sensitivity. “The weight of Israel in the index will be very, very small. It is supposed to cause an inflow, but it will be gradual,” he said. The impact could be particularly strong with Israel because current foreign ownership of local bonds is small, around 5 percent, meaning there is a lot of room for new money. Plus, real yields in Israel are attractive.

For long-term Israeli government bonds, yields are around 2 percent, compared with flat and negative yields in many developed countries.

Bank of America Merrill Lynch, meanwhile, said the Bank of Israel might need to begin a dedicated currency intervention programme to balance out the bond inflow.

The central bank, which has been buying on average $830 million of foreign currency a month to keep the exchange rate in check, declined to comment.