Many of our readers ask Wise Money Israel about what the most solid investment one can make in the Israel capital market?
Our answer is: Israel government bonds. Backed by the full faith of the State of Israel, the risk of default is minimal. The international credit rating agencies rate Israel government bonds as investment grade 'A'.
Because the risk of default is low, so is the annual yield relative to other investment vehicles. However, you are guaranteed to receive interest payments without fail. Keep in mind, that there are other investment avenues, such as corporate bonds, stocks and mutual funds, where the risks are higher, but then so are the rewards. This article is part one of the Solid Government Bond series.
Bonds are a great way to safely earn income, putting your hard-earned capital to work. Israel issues a variety of government bonds. But, which ones should I buy? Let’s look at the available options so that you can make an informed decision based on your personal needs. We will explore some important questions related to Israeli government bonds.
What bond types exist?
Israel Government bonds include short, medium-duration and long-term maturities. They can be fixed-rate or adjustable interest rate, and bonds can be linked to the Israel Consumer Price Index (CPI, cost-of-living) to provide a hedge against inflation.
Why would I buy bonds?
It is common investment wisdom that a properly diversified portfolio should have a mix of stocks and bonds, as well as international exposure. They provide a stable income source during turbulent times when stocks may not offer safety or upside potential. During the recent recession, when stocks were losing 40-80% of their value, Israel government bonds provided a safe place to park money, without the risks of volatility or default.
A unique and important characteristic of bond investing in Israel is their liquidity. Bonds are traded on the Tel Aviv Stock Exchange (TASE) just like stocks. So, even if you’re buying a longer-maturity government bond (such as a 15-year note), you can sell that bond online as soon as you please. This can be done with very little commission, small bid-ask spreads and without waiting until full maturity. This liquid market affords us the opportunity to lock in higher yields with an easy liquidation path when necessary in ever-changing economic conditions.
Israel government bonds are sold both in Israel and around the world in various currencies. But, when buying bonds on the Tel Aviv Stock Exchange (TASE), you gain direct exposure to the Israeli shekel, one of the stronger currencies since the worldwide recession. Why is gaining direct exposure to the shekel important? The U.S. dollar has eroded 17% against other world currencies in the past year alone, yet the shekel has strengthened 11% against the dollar during that time. Having all your investments in the same currency is financially unwise, and diversification can help neutralize the buying-power erosion of your local currency. Also, bonds are purchased in Israel with low minimums and are quite liquid (vs. high minimums and commissions when purchased abroad). Keep in mind that you can usually get a lower price by using a buy limit order. One can open an Israel investment account to invest in Israel government bonds directly on the TASE and in shekels. You can also buy State of Israel bonds in your home country; in this case they are bought in your own currency but paid and guaranteed by the State of Israel. You won't be gaining real shekel exposure this way, though, and your rates will be considerably lower than those in Israel for the same bond. These bonds mostly have maturities of 2-5 years, and current yields of 0.9% - 2.6% annually. Similar maturity government bonds purchased from an Israeli investment account yield 4.0% - 4.7% and are shekel-denominated.
Standard & Poor’s and Fitch international rating agencies have affirmed Israel’s investment grade 'A' rating, with an outlook of stable. Moody’s Investors Service rates Israel’s government bonds as 'A1', also with a stable outlook (comparable to S&P's A+ rating). “Israel has emerged relatively unscathed from the global financial crisis,” says Anthony Thomas, Vice President in Moody’s Sovereign Risk Group... Swift policy responses by the Bank of Israel, combined with economic resiliency, meant that Israel was able to avoid the worst of the global downturn”, he said. Israel has never defaulted or missed a single payment of principal or interest – a significant consideration in today’s tumultuous financial marketplace.
The economic infrastructure of Israel has been built mainly through government bonds. It is a way to support Israel, its economy and prosperity. For the past 60 years, Israel Bonds have provided the funds for modern infrastructure to develop and expand this essential component of economic growth. Today, Israel Bonds are focused on forward-looking infrastructure projects that will secure Israel’s place in the 21st century global economy, which will:
- Connect cities and towns throughout Israel
- Create state-of-the-art communications systems
- Accelerate technological innovation that will attract billions in foreign investment
- Provide new opportunities for Israelis from all walks of life
In the next part of this series you will learn more about government bonds, fixed-rate vs. adjustable, inflation and tax considerations, and how to determine current yields. Continue to [post=957 text="Buying Israel government bonds, part 2"].