The slide of bond prices indicates that investors anticipate economic catastrophe. But we're nowhere near that point, says the macro-economic analyst of

Investec Bank

, Liat Dagan.

Returns on bonds have reached 12% and foreign investors with whom Dagan spoke are afraid to buck the shekel's trend, she says.

"Only stability of the foreign currency market over time could persuade them we aren't facing collapse." But, she adds, the returns incorporated in Shahar (shekel-denominated) bond prices cannot be explained solely by economic parameters.

Much of the decline is due to the pervading lack of confidence in Israel's economic leadership, Dagan concludes.

On Monday the Bank of Israel governor will be declaring monetary policy for July. David Klein is widely expected to announce a steep rate cut.

"Tomorrow the governor will be facing two kinds of pressure," Dagan said. "On the one hand, the market is pricing tomorrow's rate hike at 2.5%. Raising the rates by less than that may not stop the market's deterioration. On the other hand, a 2.5% rate hike could strangle the economy even more and kill any chance of restoring growth."

A glance at the market today shows no indications of returning to normality. If there is a power that can extract the economy from recession, it is the manufacturing sector.

But manufacturing relies on technology, which is hurting from the telecommunications and hi-tech crisis around the world, she says. Matters on the security front exacerbate the situation, she added.

The only thing she sees improving Israel's economic situation is an exogenic factor, such as an improvement on the security front, a trend change on Nasdaq, of change in fiscal policy.

Dagan foresees the central bank resuming intervention in the foreign currency market unless the markets stabilize in two or three weeks.