Israeli Government Bonds

Israeli government bonds are debt securities issued by the State of Israel to raise public financing. The Government Debt Management Unit manages their issuance within the Ministry of Finance. Domestic tradable bonds include unindexed, inflation-linked and floating-rate securities; the state also has non-tradable domestic debt and issues debt internationally.^[1][2][3]

Place in government financing

Bond issuance enables the government to obtain funds in exchange for obligations defined by each security’s terms. Those obligations may include periodic interest, repayment at maturity and, for some series, adjustments linked to inflation. The Accountant General’s Financing, Debt and Credit Division is responsible for government debt management, deficit funding, treasury management and liquidity. Its Government Debt Management Unit manages bond issuance.^[1][2]

“Israeli government bonds” describes an issuer, not a single investment with uniform terms. A shekel-denominated bond trading in Israel, a bond issued in an international market and a non-tradable bond held by an institution can all represent obligations of the state. They differ in currency, payment structure, maturity, transferability and exposure to market prices. The debt manager’s annual reports consequently distinguish tradable domestic debt, non-tradable domestic debt and external debt.^[3]

Domestic issuance also has a wider market function. The Ministry of Finance describes the government bond market as a foundation for other Israeli financial instruments. Government bond prices and yields provide reference points for comparing borrowing costs across maturities, while traded securities can be used in financial-market operations. The Bank of Israel publishes government-bond yield data derived from Tel Aviv Stock Exchange trading.^[4][5]

Types of domestic tradable bonds

The Ministry of Finance’s rules identify nominal, Consumer Price Index-linked, floating-rate and short-term government bonds among the types covered by its issuance procedures. The rules also name Shahar and Galil. Because the payment provisions belong to individual series, a bond’s name alone should not substitute for its issuance terms.^[2]

**Unindexed bonds** have payments that are not adjusted to changes in the Israel Consumer Price Index. A fixed-rate unindexed series offers specified coupon payments under its terms, but the purchasing power of those payments depends on subsequent inflation. Its market price can change before maturity even though its stated coupon does not.^[2][5]

**CPI-linked bonds** connect payments to the price index specified in their terms. Their quoted yield is therefore interpreted differently from the nominal yield on an otherwise comparable unindexed bond: the two securities expose holders to inflation in different ways. Indexation does not prevent a linked bond’s trading price from falling when market yields change, nor does it make every linked series identical. The applicable indexation and repayment provisions must be read for the particular issue.^[2][5][6]

**Floating-rate bonds** have a coupon that resets according to a stated reference rather than remaining fixed throughout the bond’s life. The Ministry of Finance says that the quarterly coupon on its floating-rate government bonds is set using a benchmark based on the yield of the current 12-month Makam series. A changing coupon alters the pattern of income, but it does not eliminate changes in the bond’s market price or other risks.^[7]

The issuance rules also cover **short-term government bonds**. These should be distinguished from Makam: short-term government bonds are issued by the state, whereas Makam securities are short-term instruments issued by the Bank of Israel as part of its monetary-policy toolkit. The identity of the issuer matters even when securities have similar maturities or trade in the same financial market.^[2][8]

Issuance and secondary-market trading

The Government Debt Management Unit issues tradable domestic bonds through procedures set out in Ministry of Finance rules. Those rules describe competitive, multiple-price auctions and a non-competitive bidding mechanism through which an eligible primary dealer that bought bonds at auction may acquire an additional quantity under specified conditions. They define a primary dealer as a financial institution appointed under an agreement with the ministry. Auction participation and allocation are therefore distinct from a later purchase of an existing bond in the market.^[2]

The rules state that the bonds are deposited in the Tel Aviv clearing house and may trade on the Tel Aviv Stock Exchange, the primary dealers’ trading system or another platform authorized by the unit. Secondary trading transfers an existing bond between holders; it does not itself create a new state obligation. A traded bond’s price reflects the terms of that series and the price another participant is willing to pay at the time. Exchange trading is a notable feature of Israel’s government bond market and has also been examined in Bank of Israel research on market liquidity.^[2][9]

Price, coupon and yield are related but separate concepts. The coupon describes payments calculated under a bond’s terms. The market price is what a buyer pays or a seller receives, subject to the transaction’s conventions and costs. Yield to maturity is a calculation that relates price to the remaining contractual payments on specified assumptions. Consequently, two bonds with the same coupon can have different yields if their prices or remaining maturities differ. Selling before maturity exposes a holder to the prevailing market price rather than simply the bond’s stated repayment amount.^[5]

Yields, inflation and monetary policy

The Bank of Israel reports yield-to-maturity information for government bonds based on Tel Aviv Stock Exchange trading and publishes modeled yield curves. Separate curves for indexed and unindexed bonds help describe how yields vary by remaining maturity. A curve is a market-data measure, not a promise that a particular bond can be bought or sold at every point on it.^[5][10]

A comparison of unindexed and CPI-linked yields can produce a measure commonly called *breakeven inflation*. The Bank of Israel describes its capital-market measure as derived from the relationship between yields on the two types of government bond. It cautions that the measure includes an inflation-risk premium and can be affected by differences in taxation, liquidity and market depth. It should therefore not be treated as a direct, unqualified forecast of future CPI changes.^[6]

Government bonds also interact with the Bank of Israel’s operations. The central bank lists government bonds among the collateral it can accept for certain forms of credit and describes purchases and sales of government bonds in the secondary market as an open-market tool. In March 2020, it announced a secondary-market government-bond purchase programme intended to address market conditions during the COVID-19 crisis. Such purchases are central-bank activity in existing securities; they are not the same as the government’s primary issuance of new debt.^[8][11][12]

Tradable, non-tradable and international debt

Not every obligation in Israel’s government debt portfolio is a bond available for ordinary exchange trading. The debt manager separately reports non-tradable domestic debt and external debt. This distinction matters when interpreting figures for issuance or outstanding debt: a figure covering the whole government portfolio is not necessarily a measure of the domestic tradable bond market.^[3]

Historically, designated non-tradable bonds formed part of the arrangements for Israeli pension funds. The debt manager reported that issuance of Arad designated bonds—non-tradable, CPI-linked securities—was discontinued in October 2022 and replaced by a guaranteed-yield mechanism. Older designated bonds and their treatment should not be confused with new tradable bond series or with the replacement mechanism.^[13]

International issuance introduces another distinction. The debt manager’s reporting identifies sovereign issuance and issuance through the Israel Bonds Organization within its discussion of external financing. A security marketed internationally should not automatically be assumed to have the same currency, trading arrangements or contractual provisions as a domestic bond listed in Tel Aviv. The specific offering terms determine those characteristics.^[3]

Principal risks and interpretation

The state’s obligation to make payments does not mean that a bond has a constant market value. Rising required yields generally put downward pressure on the price of an outstanding fixed-rate bond; falling required yields generally have the opposite effect. The scale of a price change depends in part on the remaining payment schedule and maturity. Liquidity also matters: a quoted or modeled yield may differ from the price available for a particular transaction, especially when trading conditions are strained.^[5][9]

Inflation risk differs across structures. Unindexed payments may lose purchasing power when inflation is higher than anticipated. CPI-linked payments address a specified measure of inflation but remain exposed to changes in real yields and to the bond’s particular indexation rules. Floating-rate coupons adjust with their stated benchmark, yet a reset is not a guarantee of a stable sale price. Foreign-currency bonds add exchange-rate exposure for anyone measuring returns in a different currency.^[2][3][6][7]

The relevant distinction in every case is between the issuer’s contractual payments and an investor’s outcome from buying or selling at market prices. Series documentation, payment dates, currency, indexation method, maturity and trading conditions are needed to describe an individual Israeli government bond accurately. Aggregate debt reports, auction rules and yield-curve publications answer different questions and should be read accordingly.^[2][3][5]