The Netanyahu Curve: Pricing the Regime

A prime minister’s performance and popularity are not measured solely by public opinion polls; there’s a no-less-important index that reflects how stable the government, security situation and the economy are expected to be. It’s the yield on government bonds, which expresses the level of risk investors attribute to the Israeli economy. Low yields express stability and resilience; high yields are characteristic of wars, bursts of inflation or economic crises.

From this perspective, Prime Minister Benjamin Netanyahu is approaching the elections in good shape. The market is expecting him to continue serving as prime minister and is conveying its expectations of stability. The yield on Shahar bonds, unlinked debt that the government issues in shekels, have been dropping sharply over the past few months and have now reached around 2.25 percent (for medium-term bonds of two-five years ). By way of comparison, during the worst days of the second intifada, the yield on medium-term Shahar bonds was close to 11 percent.

The recent worrisome headlines about the doubling of the government deficit compared to the treasury’s forecast and the harsh things U.S. President Barack Obama said about Netanyahu have not affected the market. Investors still believe Netanyahu and Bank of Israel Governor Stanley Fischer can preserve stability even after the election, and are not abandoning the shekel for safer havens.

When the initial fears from the Egyptian regime change began to recede, the Shahar yields began to drop again, and they continued to drop even during the social protests that raged that summer. Large demonstrations didn’t faze the market, which continued to have faith in Netanyahu and his ability to stop the protest. The graph shows that the protest had absolutely no economic effect, which is another reason it has not translated into any political shift.

The market got antsy again during the political storm that followed the decision by the High Court of Justice to strike down the Tal Law governing ultra-Orthodox draft deferments, which everyone assumed would lead to an early election. But Netanyahu avoided that election, which had been scheduled for September, by taking Shaul Mofaz and Kadima into his government. Investors saw that as a brilliant move; they calmed down and the yield on Shahar bonds dropped back down to around 2.35 percent.

The next spike came in August, as fears grew of an Israeli attack on Iran’s nuclear facilities. In particular, Ari Shavit’s interview with “the decision-maker” in the Haaretz Magazine (August 10 ) convinced some investors that the fighter bombers were being readied for takeoff to Natanz.

But even this panic was limited, and the Shahar yield rose to only 2.85 percent. The rate dropped again when Netanyahu presented his bomb drawing to the UN General Assembly (September 27 ) and told the world that the “red line” had been delayed to the spring or summer of 2013. That was enough to calm the market and roll Israel’s risk level back down to its current level.

It’s no wonder, then, that Netanyahu is flaunting his UN speech, which is prominently featured in the Likud-Yisrael Beiteinu’s campaign broadcasts.

The market reflects investors’ expectations at any given moment, but it is not a prophet. Stability assumptions can be accurate one moment, and be flipped over the next, as happened a few times during the past four years. The graph of yields shows that if Israel finds itself in another crisis with the United States, or if the threat of war with Iran is revived, Israel’s risk level will go up and we’ll all pay the price in eroded savings.

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