Galil Bonds / CPI-Linked Israeli Government Bonds

Galil (גליל, Hebrew for 'cylinder/scroll' — a reference to historical debt recording) bonds are CPI-linked (inflation-indexed) long-term government bonds issued by the Israeli government. They are the Israeli equivalent of US TIPS (Treasury Inflation-Protected Securities) or UK Index-Linked Gilts — bonds where both the principal and coupon payments adjust automatically with the Consumer Price Index (Madad HaMachirim LaZarchan). Structure and mechanics: (1) CPI linkage: the face value of a Galil bond is multiplied by the cumulative CPI change since issuance. If CPI rises 3% in a year, the face value rises 3%, and the coupon is paid on the adjusted face value — the investor's real purchasing power is preserved; (2) Real yield: Galil bonds quote a real (inflation-adjusted) yield, not a nominal yield. A Galil with a real yield of 1.5% guarantees 1.5% above inflation — contrast with Shahar at 4.5% nominal, which delivers only 0.5% real return if inflation is 4%; (3) Maturity range: Galil bonds are issued in 5, 10, 20, and 30-year maturities, making them the primary long-duration inflation hedge in Israeli financial markets; (4) Institutional role: for Israeli pension funds and insurance companies with long-term nominal liabilities (defined-benefit pensions, annuities), Galil bonds provide the closest available liability-matching instrument — both the liability and the asset grow with inflation; (5) Breakeven inflation: the difference between Shahar nominal yields and Galil real yields for the same maturity represents the market's expected inflation rate — a widely-watched indicator of Israeli inflation expectations; (6) Historical significance: Galil bonds were critical instruments during Israel's hyper-inflation years (1970s–1985) — with inflation exceeding 400%, only CPI-linked instruments preserved savers' purchasing power. After the 1985 stabilization, demand shifted toward Shahar, but Galil remains the preferred instrument during inflation spikes.

In 2023, with Israeli CPI at 4.8%, a comparison: (a) 10-year Shahar at 4.5% nominal yield → real return of approximately -0.3% (after 4.8% inflation); (b) 10-year Galil at 1.8% real yield → guaranteed real return of 1.8% above actual inflation, regardless of inflation path. An Israeli retiree with a ₪1M bond portfolio switching from Shahar to Galil in early 2022 (before the inflation surge) would have preserved approximately ₪25,000–₪40,000 in real purchasing power over the 2022–2024 period versus remaining in Shahar.