Israel Bonds Explained: Who are they good for and how do they work

Governments need to finance projects and day-to-day operations, as well as to fuel the economy. This funding is primarily raised through taxes but also through borrowing. Government bonds are a type of loan that consist of investors lending money to the government to support its spending and meet obligations. The government pays interest on these bonds periodically, called coupon payments. As these bonds are backed by the government, these are considered a safe investment by investors. But, as bonds carry low risk, rewards on such bonds are also low compared to those on equity investments.

Much like other government bonds, Israel bonds are a loan you can make to the Israeli government. Israel’s government uses this money to help strengthen its economy. In return, there are two types of cash flows to the investor: (1) Fixed interest payments at a regular interval and (2) repayment of the loan at maturity.

History
The Arab-Israeli war in 1948 took a grave toll on the nation of Israel. More than 1% of the nation’s population was killed, and the economy was in a depression. To add pain to the injury, the arrival of Jews after the conclusion of World War II proved to be an additional burden on the struggling economy. Amid this chaos, an idea emerged that would prove to give a new life to the Israeli economy. In 1951, Ben-Gurion, Israel’s first prime minister, convened a meeting of Jewish-American leaders and presented to them the idea of issuing Israel bonds to help support Israel. The following Spring, Israel issued its first of what would be many bond offerings., Strikingly, the initial sales volume more than doubled the initial forecasts.

These bonds proved to be a success and within the next six years, bond sales alone contributed to 35% of Israel’s special development budget. Over the next several decades, Israel continued to issue bonds in increasing quantities, even during the times of crisis. During 1967’s Arab-Israel war, sales exceeded $250 million, and strikingly the sales doubled during the War in 1973. From the mid-1980s to the mid-1990s, the bonds were the primary way of raising external funding by the Israel Government. In 1991, during the Persian Gulf War, annual worldwide sales skyrocketed to $1 billion.

Now Israel bonds are viewed by the investors not only as a means of supporting Israel but also as an attractive financial investment.

How they work:
Israel bonds are available in variety of denominations with varying maturities to satisfy the different investment needs among potential investors. . Israel bonds fall into one of the following six categories:

1- Jubilee bonds: These bonds have a minimum purchase amount of $25,000 and are issued in increments of $5,000. Maturities available are 2, 3, 5, 10 and 15 years. Like most bonds, the longer the maturity, the higher the bond coupon rate. An example is shown in the table below for October 1, 2020. Interest is paid semi-annually.

Jubliee Bonds: A form of Israel Bond

 

2- Maccabee bonds: These bonds have a minimum purchase amount of $5,000 and come in increments of $1,000. Like Jubilee bonds, Maccabee bonds are available in maturities of 2, 3, 5, 10, and 15 years. An example is shown in the table below for October 1, 2020. Interest is paid semi-annually.

Maccabee: A form of Israel Bond

3- Sabra bonds: Sabra bonds are offered in only two maturities: 1 Year and 3 Years. One-year-maturity bonds are offered with at a minimum purchase amount of $5,000 with increments of $500. Three-year-maturity bonds are offered with a minimum subscription amount of $1,000 in increments of $100. An example is shown in the table below for October 1, 2020. Sabra bonds are part of a category called “Zero-Coupon bonds” in that interest accrues during the life of the bond but the actual cash payment of the interest is not paid until the maturity of the bond.

Sabra Bonds One Year: A form of Israel Bond

Sabra Bonds Three Year: A form of Israel Bond

4- Mazel Tov Bonds: The minimum purchase amount for Mazel Tov bonds is bonds is $100 with increments of $10. These zero-coupon bonds mature in 5 years An example is shown in the table below for October 1, 2020.

Mazel Tov Bond: A form of Israel Bond

5- eMITZVAH Bonds: These bonds have a minimum purchase amount of $36 and have increments of $18. These zero-coupon bonds mature in 5 years. An example is shown in the table below for October 1, 2020.

 

Mazel Tov Bond: A form of Israel Bond

6- Floating-Rate LIBOR Financing Bonds: These bonds mature in 2 years with a minimum denomination of $100,000 and have increments of $25,000. Interest is paid semi-annually. An example is shown in the table below for October 1, 2020.

Floating Rate Libor Financing Bond: A form of Israel Bond

Risk associated with Israel Bonds:
Though the investment in Israel Bonds appear to be an attractive investment, investing in these bonds also have potential downsides which merit consideration.

• POLITICAL RISK: Israel is located in the Middle East, a region which has had significant political risk over the more than seven decades since the founding of the Jewish state. During recent times especially, Israel has been surrounded by significant political turbulence and civil unrest among its neighbors. Although this instability in the Middle East (and North African countries) has not so far materially affected Israel’s financial or political situation, and Israel has never since initial offering defaulted in payment of interest or repayment of principal, one cannot ignore the political risk when considering whether to invest in Israel bonds.

• INFLATION RISK: The buying power of the invested funds is likely to be severely impacted by the ravages of inflation over time. The after-tax returns on these bonds is frequently at or less than anticipated inflation rates, which means that in real purchasing power both the income and the ultimate principle repayment will be severely eroded.

Investment in Israel Equity Market:
While its economy is not considered big when measuring Gross Domestic Product compared with the major economies of the world, Israel has grown significantly in recent years, owing to its large number of startups and technological advancements. Israel is leading the software, telecommunication, semiconductors, and pharmaceutical markets, with the potential to grow further. The economy has thrived over the past several decades and the average standard of living now equals most developed countries.

An investor can choose to invest in Israeli stocks in order to participate in the vi=brant growth of the economy. An investment in Israeli equities directly benefits the numerous innovative companies in the private sector with the reward of strong expected future returns. Unlike Israel bonds, whose secondary market has limited trading volumes, Israel equities of public companies are traded on the Tel Aviv stock exchange – and frequently on other leading bourses also. An investment in Israeli stocks gives the investor opportunity for growth with liquidity as well as supporting the capital markets of this great country.

Conclusion:
While Israel Bonds serve a wonderful purpose in the world, and are appropriate for some investors, for the vast majority of investors looking for a financial connection with Israel with long term upside, investing in Israeli equities may be a better approach for those willing and able to withstand market volatility on the long road upwards. For those investors primarily seeking stability and safety, Israeli bonds may be a better choice as compared to equities. Ad with many things in life, it’s not a question of either – and perhaps a combination is optimal.

Jonathan Gerber

October 2020

[*] Past performance is no guarantee of future results.  Unlike investments in Israel bonds, significantly loss of principal can occur in the short term with investments in Israel stocks.
[*] The secondary market for Israel bonds occurs between current owners and potential buyers of existing bonds.  This is opposed to the primary market, in which potential investors purchase bonds directly from Israel.