Oct. 24 (Bloomberg) — Israeli inflation-linked bonds climbed for a third day, pushing yields to the lowest level in more than three weeks, on speculation consumer prices may rise and as investors sought the notes at a government auction.

The yield on the CPI-linked bond due in June 2013 fell six basis points, or 0.06 percentage point, to 1.03 percent, the lowest since Sept. 27, at the 4:30 p.m. close in Tel Aviv. The two-year breakeven rate, the yield difference between the inflation linked bond and fixed-rate government bonds of similar maturity, surged nine basis points to 182, the highest since Oct. 2. That implies an average annual inflation rate of 1.82 percent over the period.

“Investors shored up demand at the auction today for inflation-linked bonds, taking positions on bets prices may increase,” Yaniv Hevron, head of macro-strategy at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said by telephone. “Social protests in recent months have helped to moderate food costs but housing prices aren’t coming down and are expected to fuel inflation.”

The Finance Ministry auctioned 1.5 billion shekels ($414 million) of debt today, including 400 million shekels of inflation-linked bonds. The sale of CPI-linked notes due June 2014 was 8.5 times oversubscribed, while that of the 2.75 percent inflation-linked bonds due September 2022 received orders for 4.9 times the 200 million shekels offered, according to data from the ministry posted on Bloomberg.

Price Cuts

Housing rental costs climbed 0.9 percent in September while purchase prices increased 0.8 percent, the Central Bureau of Statistics said Oct. 14. Prime Minister Benjamin Netanyahu’s Cabinet approved a program earlier this month that aims to ease the cost of living after summer rallies brought hundreds of thousands of protesters to the streets demanding social change.

Osem Investments Ltd. the foodmaker controlled by Nestle SA said today it will lower the prices of 35 products by as much as 10 percent on Nov. 1. The move follows price cuts this month from dairy producers Tnuva Food Industries Agricultural Co-Op in Israel Ltd. and Strauss Group Ltd.

The yield on the benchmark 5.5 Mimshal Shiklit bond due January 2022 dropped three basis points to 4.69 percent.

Two-year interest-rate swaps slipped one basis point to 2.78 percent, before a central bank decision on interest rates today. The Bank of Israel will hold the key lending rate at 3 percent, according to 17 of 20 analysts in a Bloomberg survey. The decision will be released at 5:30 p.m. in Jerusalem.

Europe Optimism

“The central bank will likely hold rates at today’s meeting as the outlook for containing the European debt crisis looks promising and there are indications for improvement in the U.S. economy,” Hevron said. “In addition, the situation in the local housing market doesn’t justify another rate cut at this point.”

European leaders, meeting to develop a program to end the debt crisis, have outlined plans to aid banks and ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund. Bank of Israel Governor Stanley Fischer unexpectedly cut the benchmark rate for the first time in more than two years last month, citing the global economy.

Today’s interest-rate decision will be the first by a newly appointed six-member monetary policy committee rather than by Fischer who previously had made the call. His decision last month wasn’t unanimously backed by central bank officials who gave their recommendations, according to minutes of that meeting released Oct. 10. Three economists in the Bloomberg survey expect another quarter-point decrease in the interest rate to 2.75 percent.

The shekel weakened 0.3 percent to 3.6458 per dollar at 4:34 p.m. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net