Falling bond yields herald lower mortgage interest rates

Good news for mortgage borrowers: the sharp fall in bond yields in Israel is starting to percolate through to the mortgage market, and borrowers can expect to see a fall in interest rates and in their monthly repayments in the near future. At Mizrahi Tefahot Bank, on the non-linked variable interest track, the latest anchor rate, set on June 11, fell by 0.3%. At Bank Leumi, the interest rate on the non-linked fixed interest track is expected to fall by 0.2% at the next update on June 20.

A mortgage loan is generally made up of several tracks, for each of which the interest rate is set in accordance with the risk level and other criteria. The movements on the bond market chiefly affect two tracks: fixed-interest loans, and variable interest loans for which the anchor rate is derived from yields on government bonds.

In the case of the fixed interest track, the bank is in effect a broker. On one side, it raises money, mainly from deposits and bond issues. On the other, it extends credit to its customers, among other things in the form of mortgage loans.

The difference between the cost of raising money and the price of the loan is the bank’s main source of income. When bond prices rise and yields fall, the cost of the bank’s sources of finance reduces, and the cost of credit to its customers falls accordingly. The result is that mortgage loans become cheaper.

In the case of the variable rate track, the mechanism works a little differently. The interest rate is constructed on the basis of an anchor rate plus a supplementary margin that the bank sets on the date the loan is granted. There are several types of anchor rate. The best known is the prime rate, which is based on the Bank of Israel’s rate, but in many cases a bond yield serves as the anchor rate.

Anchor interest rates based on bond yields are usually updated twice a month, in accordance with the bond yield on the day. Rises in bond prices mean falling yields, and this is almost automatically translated into a fall in the anchor interest rate for mortgage loans.

Bond yields have fallen sharply in the past month. The yield on two-year government bonds has fallen by 43 basis points, from 3.64% to 3.21%. On five-year bonds, the yield has fallen by 40 basis points, from 3.77% to 3.37%.

What lies behind the fall in bond yields? “While on global markets we’re seeing yields rising, or at least an environment in which its hard to see them falling, in Israel the cycle is completely different,” Phoenix Financial chief economist Matan Shitirit explains. “The rest of the world is currently dealing with considerable inflationary pressures – in Europe, Japan, and the US – and there the talk is of a rise in interest rates. The combination of high inflation and rising interest rates leads to bond yields staying high, and even rising in some cases.

“By contrast, in Israel the global inflationary pressures are to a large extent cushioned by the shekel. There’s always some ‘economic miracle’ here, and this time it’s the extremely strong shekel. As the shekel appreciates, it not only reduces inflationary pressures and leads to a more moderate inflation rate in practice, it also reduces inflation expectations. That is also what led Governor of the Bank of Israel Amir Yaron to say recently that if the shekel continues to strengthen and moderates inflation expectations, the bank might be able to operate the inflation tool more rapidly than previously estimated.”

This combination, Shitrit says, of a fall in inflation expectations, a rise in expectations of interest rate cuts, a fall in Israel’s risk premium, and the strong shekel, is what has led to a fall in bond yields in Israel.

Although Bank of Israel figures do not yet show an easing of mortgage interest rates, mortgage consultants say that at the next revision of anchor rates borrowers will start to feel some relief.

Published by Globes, Israel business news – en.globes.co.il – on June 17, 2026.

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