Shahar Bonds / Israeli Non-Linked Government Bonds

Shahar (שחר, Hebrew for 'dawn') bonds are the non-CPI-linked (nominal) long-term government bonds issued by the Israeli government through the Bank of Israel. They are the Israeli equivalent of US Treasury Notes/Bonds — the primary fixed-income instrument in Israel's domestic capital markets. Structure and mechanics: (1) Issuer: the Israeli government (Memshalat Yisrael) via the Accountant General; auction schedule is published quarterly; (2) Maturities: typically 2, 5, 10, and 20 year durations; (3) Non-linkage: Shahar bonds pay a fixed nominal interest rate (coupon) in NIS — the bondholder bears inflation risk. If inflation rises above expectations, the real return of a Shahar bond falls, whereas a Galil bond (CPI-linked) adjusts automatically; (4) Yield benchmark: the 10-year Shahar yield serves as the benchmark 'risk-free' rate for Israeli financial markets — it anchors mortgage rates (especially fixed-rate mortgages), corporate bond pricing, and real estate capitalization rates; (5) Institutional holdings: Israeli pension funds, insurance companies, and provident funds are required by regulation to hold a minimum allocation to government bonds — Shahar bonds are a core holding in every Israeli institutional portfolio; (6) Market depth: Shahar bonds are the most liquid security on TASE after major equities, with active secondary market trading. Shahar vs. Galil: in low-inflation environments, investors prefer Shahar (higher nominal yield); in high-inflation environments, the real yield on Galil bonds exceeds Shahar, and institutional demand shifts toward Galil. The Israeli government manages its issuance to balance both bond types across the yield curve.

In 2022–2023, as Israeli inflation rose to ~5% (well above the 1–3% target), the 10-year Shahar bond yield rose from ~1.8% to ~4.5% — reflecting both global rate hikes (spillover from US Fed tightening) and local inflation concerns. An Israeli pension fund holding long-duration Shahar bonds experienced mark-to-market losses of 15–20% on its bond portfolio, similar to the losses suffered by US fixed-income investors in the same period. This illustrated why Israeli pension managers began shortening duration and increasing Galil allocation as inflation expectations rose.