Global Bond Yields Surge as Israeli Market Shows Resilience Amid US Spread
Global bond yields and inflation drive the euro to a 1.5-year low, while Israeli bonds show relative resilience with a favorable 1.1% spread against US Treasuries amid strong fiscal data.
High bond yields are beginning to take a toll on the global economy, pushing the euro down to 1.11 USD—a low of nearly a year and a half. The primary driver behind the weakening European currency is a resurgence in inflation fueled by high oil prices, keeping bond yields above 5% and heavily burdening international markets.
Bond Yields and the US-Israel Spread
As the global bond market enters the final quarter of 2026, US yields remain exceptionally high, yet Israel is managing to partially decouple from this trend. The yield on 10-year US Treasury bonds reached approximately 5.25% at the end of the week, compared to about 4.14% for the equivalent Israeli bond—a spread of roughly 1.1% in Israel's favor. This gap widened rapidly in recent months, with Israeli 10-year yields rising by about 0.25% in September and roughly 0.4% in the third quarter as a whole, while the US saw sharper increases of about 0.53% and 0.81%, respectively.
"The gap between the Israeli and American bond markets continues to be one of the most interesting stories in the markets," says Yossi Menashe, founder and co-CEO of Altshuler Shaham Financial Services. He attributes the relative resilience of local bonds to Israeli inflation sitting at the lower end of the target range, moderate inflation expectations, and a fiscal situation performing better than initial concerns suggested.
Fiscal Stability and Inflation Environment
This picture aligns with assessments from other market institutions. Leader Capital Markets estimates that this year's deficit could total approximately 4% of GDP, coming in below the 4.6% target thanks to high tax revenues and lower-than-expected expenditures. Leader notes that the negative yield differential between Israel and the US has reached historic highs. Inflation forecasts for the coming year in Israel hover around 1.9%-2.2%. Bank Hapoalim projects 20% inflation for the coming year and a Bank of Israel interest rate of 3.25% in the near term, though it warns that rising global long-term yields effectively tighten financial conditions in Israel even without local rate hikes.
The American Labor Market and Global Outlook
The situation in the US is more complex. The September employment report showed an addition of just 29,000 jobs compared to expectations of around 90,000, while annual wage growth moderated to 3%. Following these figures, the probability of an interest rate hike in October plunged to about 20%, down from roughly 70% at the beginning of the week. However, the drop in rate expectations failed to significantly pull down long-term yields, with the 30-year US bond yield hitting approximately 5.62%, the 10-year reaching about 5.27%, and the 5-year touching 5.02%, driven by massive fiscal deficits, large-scale debt issuance, and energy prices.
