Overpriced Israeli corporate bonds may come down amid stock market unrest

“Volatility on the US stock exchange brings us volatility here, and it could make a financial impact in the Israeli market through corporate bonds.”

By
February 12, 2018 19:38
2 minute read.
Tel Aviv Stock Exchange

An electronic board displaying market data is seen at the entrance to the Tel Aviv Stock Exchange. (photo credit: REUTERS)

Israeli stocks on the TA-35, the Tel Aviv Stock Exchange’s flagship index, have gone down slightly more than 5% since January 28.

“Volatility on the US stock exchange brings us volatility here, and it could make a financial impact in the Israeli market through corporate bonds,” said Alex Zabezhinsky, chief economist at Meitav Dash Investments. “If this continues for a couple of other weeks, there won’t be no new issues of corporate bonds.”

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Prices are going down on Israeli corporate bonds, Zabezhinsky said, because of the outflow of public money. But the decline may be a welcome correction in market rates.

“For example, the yields of a company rated A in Israel, it’s similar to BB in the US. The yields of bonds rated A in Israel were lower than US Treasury government funds. It’s very expensive, it’s very overcrowded.”

Much of the market volatility – with the Dow Jones falling some 9% since its all-time high on January 26 – can be explained by concerns over higher interest rates worldwide. That comes after a decade of the US Federal Reserve and the Bank of Israel guaranteeing cheap, zero-interest lending.

Other destabilizing factors include a possibly overheated US stock market – rising non-stop since the November 2016 election without a correction.

“Israeli companies and their stock prices have not specifically been affected by the recent downturn in US markets,” Seeking Alpha analyst David Kaplan told The Jerusalem Post. “Not to say that they have bucked the trend, but compared to the volatility seen abroad driven in part by trading around ‘fear indices’ and volumes in cryptocurrencies, Israel asset prices are relatively stable.”

That said, many Israeli tech companies are listed on the American exchange, and falling stock prices could affect their bottom lines.

“When Google and FB [Facebook] and Amazon and NVidia and Netflix are being sold off sharply, it shouldn’t be a surprise to anyone that Israeli tech stocks will also get caught in the downdraft,” said Steven Schoenfeld, founder and chief investment officer of New York-based BlueStar Global Investors.

And a number of Israeli pension funds, insurance companies and financial institutions have significant exposure to foreign fluctuations.

“For the last two years, Israeli institutions have ignored the local market. They’ve been focused on foreign stocks and US stocks. Many chased the strong returns abroad, and many of them increased their investments in non-Israeli stocks as foreign markets went up,” Schoenfeld said.

Now, Israeli institutional investors could look again at the local market, he added, and reassess their Israeli equity exposure.

Both American and Israeli investors fear future inflation, even though consumer price inflation in the US stood at 2.1% in 2017 and at 0.4% for Israel last year, a relatively low rate.

Concerns over inflation may make bonds seem less appetizing since rising consumer prices take away from bond investors’ returns. This is after a decade – since the 2008 financial crisis – of investors pouring money into government-issued bonds.

With bond prices dropping, their yields rise – and the benchmark 10-year US Treasury yield soared to a four-year high last week. In Israel, government yields are significantly lower.

The low bond yields were partially helping to prop up the stock market rally.


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