New Israeli shekel banknotes and coins. Photo: Pixabay.

Israel’s financial system faces significant risks from falling US bond yields and high global debt levels, the Bank of Israel said on Sunday in a semi-annual financial stability report.

The central bank noted that global growth and rate forecasts continued to moderate in the first half of 2019, while major central banks halted the trend reducing monetary accommodation that was prevalent in 2018.

This had led to an inverted US bond yield curve and the Bank of Israel cautioned that should credit quality ratings decline, global asset prices would fall sharply and lead to a significant tightening of the global financial environment, which would impact Israel’s market.

“This effect, if it takes place, will be felt mainly through the financial channel, particularly due to the high correlation between the capital markets in Israel and abroad, and it may have significant ramifications on financial asset prices in Israel, and on the decline in the desire to take financial risks,” the central bank said in its report.

“Therefore, the potential for contagion through the financial markets remains significant.”

It added that liquidity risks have risen in view of lower trading volumes and amid a high weight of holdings in corporate bonds by mutual and other liquid funds.

“Should a global crisis develop, all these may increase the intensity of the declines in asset prices,” the report said, noting that the volume of global investments in Israeli companies and particularly in the communications and computer services industry, “is also a channel for exposure to global risks.”

The central bank warned of a higher government credit risk due to a budget deficit — currently an annual 3.8 percent of GDP — that is well above its target.

It said risks in the real estate market had declined in the past half year along with a slight drop in housing price, but the bank urged the government to boost investment in housing construction to prevent future difficulties that would harm the entire economy.