Israel’s risk premium has fallen sharply following the agreement that is taking shape between the US and Iran and has reached levels not seen since the eve of the judicial reform in early 2023. However, it has since climbed slightly, together with the stock market falls and weakening of the shekel.
To what extent is the risk premium related to the Israeli economy, how does it affect macroeconomic indicators, and how will its recent volatility affect the Bank of Israel, which will set the interest rate at the beginning of the month?
What is Israel’s risk premium?
When investors purchase Israel’s bonds, they seek to insure their investment against the country’s risk. One way to examine this is to compare the yield on Israeli bonds to that on US bonds, with the difference between them, known as the “spread,” reflecting the risk premium that the market attributes to Israel.
The second way is based on CDS (credit default swap) contracts, a financial instrument issued by financial institutions and used as insurance for bondholders. The investor pays a periodic premium, and in return, if Israel defaults, the institution that issued the contract will pay in its place – both the interest and the principal, according to the terms of the agreement.
How is it measured, and what does it show?
The price of a CDS contract is denominated in basis points. Thus, in November 2022, before the announcement of the judicial reform, Israel’s risk premium stood at just under 40 basis points. This means that the cost of insurance at that time was 0.4% of the insured amount. At the height of the reform, it stood at 60-65 basis points, and with the outbreak of the war on October 7, it jumped to 140-160 basis points.
Over the past few years, Israel’s risk premium has experienced a series of upheavals: after the Beeper operation against Hezbollah, it moderated, but rose again following the operations in Iran. With the signing of the agreement between the US and Iran, it recorded a dramatic decrease to about 49 basis points, but this week it climbed slightly to 54 basis points.
At the same time, there have also been changes in the second index that examines the risk premium, which is the spread between Israeli bonds in dollar terms versus US bonds, which showed ups and downs, until it stabilized at a level similar to that before the war after the signing of the agreement between the US and Iran.
Does the premium accurately reflect risk?
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In the presentations of Bank of Israel Governor Prof. Amir Yaron, a prominent slide illustrates how geopolitical events are related to changes in the premium, but this is only an indicator and not an accurate measure.
“The problem with CDS is that it is not so tradable, but rather an insurance premium, so it is worth taking it with limited liability. In contrast, Israel’s dollar bond and its comparison to the US bond is more accurate,” says Meitav chief economist Alex Zabezhinsky.
Bank Hapoalim chief economist Victor Bahar emphasizes, “Some of the activity in the dollar bond market is by Israeli players, and there are even three series of dollar bonds by Israelis that have begun trading on the Tel Aviv Stock Exchange. Therefore, the indices reflect the risk premium, but because Israelis have a local investment bias, and we are less sensitive to risks, this lowers the premium. However, for major events, the indices definitely hold water.”
Accordingly, the two economists are not concerned by the small increase in the risk premium shown since the signing of the US-Iran agreement, and according to them, this could be volatility stemming from liquidity.
How do we compare to other countries in the world?
Zabeshinsky explains that even if Israel’s risk premium fell to the level it was on the eve of October 7, relative to other countries, the risk premium remains high. This is because during the period in question, the average risk premium of 25 countries with a similar risk rating fell by about 40 basis points. In addition, since the news of the Iran deal, the risk premium of other countries has also shown a decline.
What is the connection between the risk premium and the stock market and the shekel-dollar exchange rate?
In the Bank of Israel presentations, you can see the changes in the shekel-dollar exchange rate according to the increases and decreases in the risk premium following geopolitical events, but the answer to this question is much more complex. According to Bahar, the risk premium is indeed affected by geopolitical events, especially at extreme points.
“The risk premium would probably be more sensitive to events if we only saw foreigners trading in it,” he says. “In contrast, the exchange rate has a life of its own, and it is affected by the risk premium, but also by other things such as the financial markets and their impact on the exchange rate, and the currency is more sensitive to them than geopolitics.”
Bahar adds that the TASE’s recent underperformance is related to the public mood, with the agreement being received negatively in Israel. “The public here sees this agreement as a risk, and so the geopolitical situation has certainly not improved since the war, and that has an impact,” says Bahar.
“In addition, the market has made significant moves in stocks, and the question arises as to whether in certain sectors there is economic justification for high pricing. The current trigger is probably the geopolitical situation, and it has encountered concerns about high pricing, and we see a correction due to the very high price increases that there have been here.”
Bahar adds that the performance of the TASE and the shekel move in parallel with the risk premium, but each has its own factors. “The risk premium is not affected by the Nasdaq, while the exchange rate is definitely affected. The TASE is certainly affected by Nasdaq and also by geopolitics and the level of investor confidence here. Even if the agreement improves Israel’s situation, it does not matter, because the Israeli investor is discouraged and acts accordingly with negative sentiment.”
How does the change in the risk premium affect interest rate decisions?
The Bank of Israel tends to emphasize that the interest rate is determined by a series of variables, including Israel’s geopolitical uncertainty. The risk premium indicators described above are part of this picture.
Zabeshinsky says, “I remember there were cases where this was a consideration that appeared in the first line of the Monetary Committee’s announcement, the bank does not look at slight fluctuations but at a trend. I also remember cases in which the bank showed that the risk had increased without the premium having increased accordingly.”
Bahar observes, “With the numbers we see, the premium will not prevent the Bank of Israel from cutting interest rates. We were at similar numbers before the war and at even lower numbers before the judicial reform, but since then the risk rating has risen. I believe that now it will not stop interest rate cuts.”
Published by Globes, Israel business news – en.globes.co.il – on June 25, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
