Israeli Treasury Raises Billions in Bonds Amidst Rising Interest Rates and Post-War Financial Challenges

Accountant General's Department of the Treasury recently raised an impressive 1.425 to 1.45 billion dollars through two series of government bonds denominated in dollars. The bonds, with maturity dates in 2027 and 2031, were secured at a high-interest rate of 6.4%, marking a significant margin of nearly 200 basis points over comparable American bonds trading at approximately 4.5%. This substantial increase in the interest rate contrasts sharply with the Hashkal branch's previous practice, as illustrated by the issuance in January at a margin of only 95 basis points above U.S. bonds.

Historically, the Hashkal branch routinely disseminated press releases regarding such bond raises. However, a notable departure from this tradition has been observed in the recent period. The department now asserts that all issuances are promptly and regularly reported through market information systems like Bloomberg, a departure from past communication practices.

The surge in interest rates over the past year and a half is attributed to heightened geopolitical uncertainties following the coup d'état announcement and the subsequent war. This trend is evident in bond yields, which now trade at levels comparable to countries with a BBB rating, despite Israel maintaining an AA- rating. Additionally, the risk premium associated with Israeli government bonds has risen significantly, as reflected in the increased yields of credit default swaps (CDS) – insurance certificates against non-payment of government bonds.

This latest bond raise is the third instance of the Hashkal raising funds abroad in the recent period. In the preceding weeks alone, the department secured issues totaling 1.8 billion euros and an additional 800 million dollars. Last month, a substantial sum of 2.5 billion dollars was transferred to the government's account at the Bank of Israel.

In tandem with these international financial maneuvers, the Hashkal executed "swap transactions" amounting to NIS 3 billion. This strategic move involved offering longer-term government bonds in exchange for a higher interest rate. The objective is to defer payments, a crucial tactic in light of the formidable financial challenge posed by the anticipated deficit following the war.

Finance Minister Bezalel Smotrich has consented to relinquishing 1.6 billion shekels of the coalition funds available in 2023. However, he remains adamant about discussions concerning the coalition funds in 2024, where the stakes are considerably higher. According to budget department calculations, forgoing NIS 7.9 billion of the coalition funds could serve as a critical measure to finance the civilian costs incurred during the war.