In response to yesterday's announcement by the Bank of Israel that it will begin buying government bonds, Clal Finance Batucha macroeconomic analyst Ori Greenfeld says that by boosting demand for these bonds, the Bank of Israel is forcing down their yields, which will lower long-term interest rates.
Lower yields for long-term government bonds will render them less attractive investment instruments, which may drive investors to seek alternative investments that bear higher yields, albeit at higher risk. In other words, investors will turn to corporate bonds instead of government bonds.
Greenfeld adds that the drop in investors' returns on government bonds could push banks to take risks and inject more credit into the market - the goal of the Bank of Israel.
Mizrahi Tefahot Bank strategy and investments division manager Ronen Menachem says, "The Bank of Israel's announcement that it will buy various government bonds with various maturities on the secondary market is no surprise, as it resembles a similar policy by the US Federal Reserve Bank. The Bank of Israel indicated that it would take such action in its last interest rate announcement."
Menachem adds that the measure is important, desirable, correctly timed, and fits in well with the other measures that the Bank of Israel is taking. These include reducing tenders for short-term notes, adding monetary credit tenders for longer periods, narrowing the spread on the Bank of Israel interest rate (which is used as a credit window and deposit window by the commercial banks), and extending the maturity of repo tenders, all of which were announced by the Bank of Israel on December 24. At the time, analysts said that they were not enough.
Published by Globes [online], Israel business news - www.globes-online.com - on February 17, 2009
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