Israel sells $5 billion of bonds despite Gaza ceasefire concerns

Adds details throughout, finance minister comment

By Steven Scheer

JERUSALEM, Feb 12 (Reuters) - Israel sold $5 billion of five- and 10-year bonds in an international debt offering overnight, the finance ministry said on Wednesday, the country's second such issue since war broke out 16 months ago.

Overcoming downgrades from all three major credit rating agencies in 2024, Israel sold $2.5 billion of five-year bonds at 120 basis points over comparable U.S. Treasury yields and another $2.5 billion of 10-year bonds at 135 basis points over U.S. Treasuries.

Five-year Treasuries currently trade at 4.39%, while 10-year yields are at 4.55%. In all, Israel is paying 5.375% and 5.626%, respectively, the ministry said.

A historic shake-up of the Middle East over the past 16 months is starting to draw international investors , warming to the prospects of relative peace and economic recovery after so much turmoil.

Despite the war with Hamas militants in Gaza and the ratings cuts, the spreads were lower than on Israel's record $8 billion bond offering nearly a year ago when the country paid 135 basis points over Treasuries for five-year bonds and 145 basis points for 10-year debt.

Demand in the latest issue reached $23 billion and some 300 different investors from more than 30 countries worldwide took part in the sale, including major institutional investors, the ministry said.

The issue also comes amidst concern a ceasefire between Israel and Palestinian militant group Hamas to release remaining Israeli hostages held in Gaza and to stop fighting in the enclave is in danger of collapse.

"Even in a challenging period of war, Israel continues to maintain its position as an attractive investment destination," Finance Minister Bezalel Smotrich said in a statement.

Accountant General Yali Rothenberg said the offering reflected Israel's financial stability and "the high level of confidence that global investors have in the Israeli economy".

"The spreads in this issuance indicate a significant reduction in Israel’s risk premium," he added.

CREDIT DEFAULT SWAPS RISE

Israel's five-year credit default swap (CDS), the cost of insuring its debt against default, edged up roughly two basis points overnight to reach 91 bps on Wednesday, the highest since January 16. The CDS had traded at around 85 bps before the latest doubts over the ceasefire deal but had peaked above 167 bps last October.

Israel typically taps international markets early in the year. The government aims to finance up to 20% of its funding needs with foreign issues that include private placements and 80% through the local bond market.

Israel's borrowing needs soared in 2024 as it spent around $25 billion to finance its military conflicts in Gaza and against Hezbollah in Lebanon. Israel and Lebanon reached a ceasefire deal in November.

The wartime spending has forced the government into an austerity budget for 2025, which has yet to be approved. Failure to pass the budget by the end of March would trigger new elections.

Rothenberg and his deputy were in London in early January for meetings with investors, following meetings in New York, Washington and Philadelphia, to gauge investor interest and determine whether the issue would be dollars or in euros.

At the time, he said that despite anti-Israel sentiment globally due to Israel's ongoing military conflicts in the region, demand for Israeli debt was expected to be strong as usual.

Bank of America, Citi, Deutsche Bank, Goldman Sachs, and JP Morgan served as underwriters for the transaction.