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Leading Israeli banks were the main buyers in the €400 million bond issue last week. Most of the bonds were acquired as a nostro investment, TheMarker has learned.

For the banks, this is an especially attractive investment for several reasons. First, the issue carried relatively high interest. Several days after the initial offering, the bonds are still trading at euro-linked 5.85% redemption yield. This is much higher than similar European bonds, which carry significantly lower yield.

Secondly, since the bonds were issued by the state, the banks are exempt from provisions for risk and minimum capital ratio. Banks follow regulations that guide banks to maintain a minimum capital ratio provision for each investment except for investments in OECD or Israeli government bonds.

But because of the low interest rates available in the world today, the interest on government bonds issued by OECD countries is relatively low. On the other hand, the new bonds carry much higher yield than the foreign currency-linked bonds trading in Israel, such as the New Gilboa.

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As reported by TheMarker last Friday, the €400 million bond offering was intended only for foreign investors, which was spelled out in the prospectus. But just a few hours after the offering most of the bonds landed in the hands of Israeli institutional investors, namely banks.

The banks didn't have to make a particular effort to acquire the bonds because after the issue there is no restriction on the identity of the buyers. Today, as on Friday, any Israeli investor, whether institutional or not, can contact a big European investment bank, which will acquire the bonds for the Israeli investor and transfer them to the investor's account.

The Finance Ministry's declared aim is to develop an overseas a market for Israeli bonds, except that in practice this doesn't happen because the bonds suffer from low tradability, attracting few foreign investors.

In addition, the ministry paid a high price for the offering. In a direct offering in Israel the ministry could have obtained a much higher price for the bonds, saving the state tens of millions of dollars.

Given this reality, it is not strange that even the Tel Aviv Stock Exchange has begun looking into the possibility of listing these bonds for trade. To this end the exchange has sought the advice of Accountant General Nir Gilad, who has expressed no interest.