Main Characteristics of the Domestic Debt

(1) Tradable Domestic Debt

In line with the long-term trend, the proportion of unlinked debt out of total tradable domestic debt rose to 59% in 2007, from 57% in 2006. The increase in the unlinked component of tradable domestic debt resulted from new funding focusing on unlinked bonds and from redemptions of significant volumes of CPI-linked series during 2007. The proportion of dollar-denominated debt remained negligible; bonds in the amount of just NIS 300 million remained at the end of 2007.

Distribution of Tradable Government Bond Holdings

An examination of the distribution of tradable government bond holdings indicates no dramatic change in the proportion of foreign investors' holdings in 2007. These holdings comprised 3.8% of the total inventory of tradable government bonds at the end of the year, versus 4.7% in 2006. Note, however, that the proportion of foreign investors' holdings has increased substantially in the last three years. Significant developments occurred in the proportion of direct holdings by the public, which stood at 24.1% at the end of the year, versus 19.5% in the previous year. Looking at long-term trends, the increase in the proportion of holdings of pension funds, which started in 2004, has continued. As a result of the reform in pension funds, the volume of issues of nontradable bonds to these funds fell drastically, so that the funds redirected their investments to the capital market. This led to an increase in the funds' share of holdings, from 2% in 2003 to 10.6% in 2006. This trend continued in 2007, and the rate of pension funds' holdings reached 11.0%. Note that in contrast to forecasts, purchases of government bonds have not focused on CPI-linked bonds alone since the beginning of the reform, but have included unlinked bonds as well. Another segment whose share of bond holdings increased is mutual funds, which held 14.2% of total tradable government bonds in 2007, compared with 12.4% in 2006. The trend of decreasing holdings of provident funds and insurance companies continued in 2007. Provident-fund holdings stood at 18.4% at the end of 2007, versus 24.1% in 2006. As compared to 2001, provident funds' weight fell by more than half. Insurance companies' share of holdings reached 8.9%, versus 9.7% in the previous year. The rate of holdings of banks did not change significantly, standing at 18.6% at the end of 2007, versus 17.8% in 2006. The Bank of Israel's share of tradable bond holdings was 1.1% at the end of 2007, down slightly from 2006, when the central bank's holding rate was 1.2%.

Number and size of series

As part of the effort to increase tradability and liquidity in the domestic bond market, the Ministry of Finance is reducing the number of government-bond series while increasing their volume. The policy of issuing large series continued in 2007, as the average series size rose to NIS 5.5 billion, due to the redemption of small series as well as large issues. This trend is expected to continue in the coming years as well.

Average Size of series, 1995-2007 (NIS billions)

The Debt Management Unit issued four new series in 2006. The series Shahar 2690 (maturing in 2008) and Shahar 2683 (maturing in 2016) were issued at the beginning of the year. Two long-term series were issued in the second half of the year, within the new regulations under the State Loan Law: a twenty-year government bond (unlinked, fixed coupon) and a thirty-year government bond (linked, fixed coupon). Five new series were issued in 2007. Five-year and ten-year government bonds, three-year linked government bonds, and two short-term government bonds with a term of four months were issued within the new regulations. Six bond series matured in 2006, including a Shahar series with a volume of NIS 15 billion. Eleven series matured in 2007, including a Shahar series with a volume of NIS 16 billion. As a result of the above, the decrease in the number of traded series continued, reaching 46 at the end of 2007. The Unit intends to maintain a low number of issued series in the coming years as well, so as to continue the downward trend in the number of traded series.

Number of tradable government bond series, 1992-2007

(2) Non-tradable Domestic Debt

The trend of decreasing volumes of nontradable domestic debt continued in recent years; this debt reached NIS 144 billion at the end of 2007, versus NIS 145 billion at the end of 2006. The inventory of debt in respect of nontradable bonds issued to pension funds (Arad and Miron bonds) stood at NIS 102 billion at the end of 2007, reflecting a 3% decrease from the balance of debt at the end of 2006. The downward trend of the volume of debt in respect of nontradable bonds for pension funds is expected to continue in the coming years, in light of the reform in pensions, in which the volume of new bond issues to these funds was significantly reduced. However, the volume of issues to pension funds already increased in 2007; the increase is expected to grow in the coming years. The inventory of debt in respect of nontradable bonds held by insurance companies (Chetz bonds) grew by 4% in 2007, to NIS 33 billion at year end. In accordance with the policy of the Accountant General, the balance of emissions managed by the Accountant General and compulsory loans managed by the Bank of Israel decreased by NIS 0.3 billion during the year, reaching a total of NIS 8.9 billion, a 3% decrease compared to 2006.

Distribution of non-tradable debt by type, 2001-2007

	2001	2002	2003	2004	2005	2006	2007
Total (in NIS billions)	148	161	161	156	153	145	144
Pension (Arad & Miron)	104	116	119	115	112	105	102
Insurance (Chetz)	28	30	30	30	31	31	33
Miscellaneous(1)	16	15	12	11	10	9	9

(1) Including compulsory loans managed by the Bank of Israel and emissions managed by the Ministry of Finance.

Length of Debt

Average time to maturity is the central indication for determining the length of debt. The average time of total government debt is 6.5 years as of the end of 2007, similar to 2006. The increase in the length of tradable domestic debt, from 5.5 to 5.9 years, mainly resulted from positive net funding (a surplus of funding over redemptions) and a focus on funding for long benchmark periods. By contrast, the length of nontradable domestic debt decreased, from 6.8 to 6.5 years, as a result of the small volume of issues of nontradable bonds to pension funds, which are characterized by long original terms to maturity; the length of external debt also decreased, from 8.0 to 7.8 years, due to the small number of issues and short-term funding by the Israel Bonds Organization. Another indication for the debt length is duration. The duration of bonds is calculated based on the terms of all payments which the bond pays over its lifetime, weighted by the capitalized payment. As shown in Table below, there was no significant change in the total duration of government debt in 2007; however, opposite trends can be seen in domestic debt versus external debt, similar to those of the average term to maturity.