Discount Bank Review: Bond Yields Stabilize Amid Geopolitical Uncertainty

Geopolitical uncertainty continues to impact financial markets, with energy prices, interest rate expectations, and economic concerns in Europe taking center stage for investors. According to the weekly economic review by Discount Bank covering October 4 to 13, 2026, analysts point to a certain calming in government bond markets following the yield increases recorded in recent months.

In the US, upcoming inflation data is expected to draw significant interest amid rising energy prices and debates over the Federal Reserve's next steps. In Israel, markets price in a low probability of another rate cut in early 2027, driven in part by electoral uncertainty, the stabilization of the shekel, and global developments.

US Markets: Fed Not Rushing to Raise Rates

The minutes of the Federal Reserve's latest rate decision indicated broad support for a potential rate hike during September. According to the review, some committee members view the move as a risk-management tool and a way to tackle price pressures stemming from strong demand. Others emphasize high inflation and ongoing supply shocks as justifications for further monetary tightening.

However, committee members do not support a prolonged cycle of rate hikes nor do they intend to raise rates rapidly. This comes against the backdrop of rising oil prices, which have influenced market rate expectations over recent months. Despite the energy price hikes, a certain moderation in expectations was recorded over the past week.

A senior Fed official noted that data released since the last rate decision pointed to some moderation in inflation and the labor market, yet still believes an additional rate hike is necessary due to excessively high inflation. He stated that rate hikes do not necessarily need to take place at consecutive meetings, which reduced the likelihood of a hike as early as October.

Bond Market Stabilization and European Concerns

Over the past week, volatility in US government bond markets moderated slightly. Bond yields across the curve dropped by a modest 3 basis points, while the slope of the curve remained unchanged. Contributing factors included strong demand in US Treasury long-term bond auctions. However, Discount Bank notes that past increases in the bid-to-cover ratio also occurred during periods of rising yields, meaning it does not necessarily signal a trend reversal.

In Europe, concerns persist regarding France's fiscal situation amid political instability and difficulties in reducing the government deficit. Over the past week, these concerns eased slightly, with the yield on 10-year French government bonds stabilizing at 4.9%—a spread of 1.4 percentage points over comparable German bonds.

Israeli High-Tech Sector Shows Resilience

In Israel, economic activity data presents a mixed picture. Services exports contracted by 4.7% in July 2026, yet posted an annual increase of 10.8%. The decline was partly driven by a 5% contraction in high-tech services exports, which nevertheless completed a 10.1% annual growth rate—a moderate pace compared to previous months.

Alongside this, the September business tendency survey reflects high-tech companies' expectations for a recovery in the export growth pace. Concurrently, a moderate increase was recorded in the number of companies reporting labor shortages.

Another indicator of the sector's strength is wages. According to the review, average high-tech wages rose by 7.4% over the past three months compared to the same period last year, following a more moderate increase in the first quarter. Discount Bank notes these figures demonstrate that the sector continues to exhibit resilience despite concerns regarding artificial intelligence adoption and a strengthening shekel.

Private Consumption and Interest Rate Outlook

Consumption data indicates robust household activity. August saw a 3% increase in credit card purchases compared to July, alongside a 9.6% annual growth rate, reflecting strong private consumption after a downward revision in prior months.

Regarding the Bank of Israel's interest rate, markets assign only a 25% probability to another rate cut in early 2027, while pricing in expectations for rate hikes starting in September 2027 up to 3.5% by year-end. These expectations are shaped by election uncertainty in Israel, the stabilization of the shekel alongside rising oil prices, and global market trends.

Discount Bank concludes that it is still premature to entirely rule out another rate cut, given the low inflation environment and projections for only moderate inflation growth. Decisions will continue to depend on economic developments, price data, and geopolitical conditions.