Yields on Israeli bonds have fallen below yields on U.S. Treasury bills for the first time in history, analysts said on Monday.

The effective gross yield on 10-year fixed-income Shahars ranges between 4.37 and 4.84 percent, while shorter terms are lower between 3.79 and 4.11 percent. Treasury bills in comparison currently yield anywhere up from 4.7 percent.

Analysts noted that the slump in the U.S. economy and an expanding trade deficit had led to higher yields on Treasury bills, while a narrowing deficit in Israel and strong economic indicators had led to declines on yields in Israeli bonds.

"(Israel's) government deficit is around zero for 2007, as a cause of which government supply (of bonds) has ebbed, while the United States has had to finance a growing deficit by issuing more bonds at a higher yield," Leader Analyst Sagi Toznerson said.

He noted that while the yield on Israel's shekel-denominated bonds had dropped, the yield on Israel's dollar-denominated bonds hadn't.

"We need to look at the Israeli dollar bonds, which are still traded around 78 basis points above Treasury bills (at about 4.7). Only the shekel bonds remain below, which shows how everything is really connected to the shekel's appreciation," Toznerson said.

The shekel has so far gained more than seven percent in 2007 following an eight percent increase in 2006 and is one of the best performing emerging market currencies.

Israel's central bank has cut short term lending rates by a cumulative 175 basis points since last October in an attempt to lift low annual inflation levels back to within the government's target level, but has failed to curb the shekel.

With a net redemption of bonds of about 25 billion shekels ( about 6.3 billion U.S. dollars) expected in 2007, analysts expect the higher liquidity to be fueled into increased investments in mutual funds.

"Demand for mutual funds is very high supported by a strong market, and a low exchange rate, and is likely to increase further as liquidity increases with the redemption of (the) Shahar 70 ( series)," IBI Analyst Gil Chen said.

He added that approval of Israel's entry to the Organization for Economic Cooperation and Development would lend additional support.

Poalim Sahar Analyst Eyal Menachem said that while foreign investors had pushed yields to levels around five percent, the most recent rise in yields had been propelled by investments in mutual funds by local investors. (1 U.S. dollar = 4.0 Israeli shekels)

Source: Xinhua