Are Israel bonds a good investment? That’s the question we wanted to answer, as we will learn in this article whether investing in a foreign country that has been historically linked to the United States, is a smart investment strategy.
With titans of the investment world like Warren Buffet, who has invested a personal $5 million in Israel bonds, stating “You can tell prospective investors I would have taken a perpetual bond if you had offered one. I believe Israel is going to be around forever”, it seems like a very sensible choice for every type of investor across the board.
It’s a government’s responsibility to their people, to fuel the economy and finance day-to-day operations for long-term economic growth. The most common way a government makes its money, that everybody is aware of and that everyone has to go through, is taxes.
However, another popular way a government makes its money is by borrowing money. This is where the role of bonds comes in.
Here’s a quick rehash of bonds and how they work in the investment space: Investors will lend money to corporations, businesses, banks, and governments, to allow them to carry out their duties and to help them grow and prosper. As a quid-pro-quo, they will pay interest on these bonds, periodically. Meaning they are generally considered a safe option for investors, either cashing in regular intervals or taking repayment of the loan at maturity.
With this all said, let’s take a look at the history of the country, how Israel bonds work, and finally give our recommendations to you.
It’s no lie that Israel is steeped in historical conflict with its bad blood with bordering Arab nations. After World War I and with the influx of Jewish immigrants to the country, in 1951 the Israeli Prime Minister Ben Gurion presented the idea of Israel bonds to help support the overwhelmed population.
Initial sales of these bonds were double the initially forecasted amount. It was safe to say that this idea took off for the country and did wonders for the economy, especially in the early days of its inception. Wealthy Jewish citizens could help their land prosper.
Over the next several decades, Israel bonds have continued to grow, even during tumultuous times, such as the 1973 War where sales doubled, and during the Persian Gulf War where annual sales exceeded over $1 billion.
As we mentioned, the majority of investors in the bonds were Jewish people who wanted to help Israel go through a period of economic growth. Now over 90 U.S. state and municipal pensions and treasury funds have invested at well over $3 billion. By 2013, U.S. bond sales surpassed the $1.12 billion mark, which is the first time domestic sales have exceeded the $1 billion target.
How do they work?
Unlike typical investment bonds, Israel bonds are issued by the State of Israel, with the intention of being purchased as gifts for certain things like meaningful occasions such as weddings, graduations, births, and bat mitzvahs. The bonds are available in a multitude of different varieties and varying maturities, depending on the need of the investor.
Maccabee bonds have a minimum purchase of $5,000 and come in increments of $500, available in maturities at 2,3,5,10 and 15 years at varying interest rates. Similar to this are Jubilee bonds that have a minimum purchase buy-in of $25,000 with $5,000 increments and maturities at 2,3,5,10 and 15 years. Both of these bonds pay interest on May 1st and November 1st.
Sabra bonds are offered at only 1 and 3-year maturities, with 1-year maturities being offered a minimum purchase amount of $5,000 with increments of $500, whilst 3-year maturities are offered with a minimum purchase of $1,000 in increments of $100. This type of bond is categorized as “Zero Coupon bonds” meaning interest accrues throughout the life of the bond, but actual cash payment isn’t made until the bond matures.
Mazel Tov bonds have a minimum purchase requirement of $100 with increments of $10, and the zero-coupon bonds mature in 5 years, whilst eMitzvah bonds have a minimum purchase of $36 and have increments of $18m, where the zero-coupon bond matures in 5 years. The majority of eMitzvah bonds are purchased by Jewish people, whilst Israel bonds are available to all U.S. residents.
Finally, you can purchase Floating-Rate LIBOR Financing bonds, which have a minimum denomination of $100,000 in increments of $25,000, with interest being paid semi-annually.
Israel bonds are specifically designed to be purchased by U.S. residents, and in order to purchase them, they need to be done via the United States Development Corporation For Israel. You won’t be able to buy these bonds like a typical fixed-rate investment bond. In order to do this, you’ll need to set up an account, which can be done online. Israel bonds are denominated and pay interest in U.S. dollars, so you won’t have to do the leg work of exchanging the currency from Israeli Shekels.
Why you might consider purchasing Israel bonds
You wouldn’t consider Israel a big capitalist powerhouse, especially when compared to western countries like the United States, and many countries in Europe. You would argue that its mercantilist stance, or high export and low import could potentially limit its long-term growth. So for the million-dollar question: are Israel bonds a good investment and should you invest in them?
Israel has boomed over the last few decades. Due to technological advancements, pharmaceutical, technological, and telecommunications markets have exploded, leading to an upward growth of the generally low Gross Domestic Product, when compared to other major economies.
You could argue that the standard of living is close to many first-world countries, and the country has a lower average debt than many other countries such as the U.S., China, and Greece.
Due to the diverse types of bonds available, there are options for a wide array of investors, from beginner investors looking to invest a small percentage of their portfolio, or large investors with more capital that want to support their retirement fund. The interest rates are also reasonable and return a good profit once maturity has kicked in.
Risks with Israel Bonds
The elephant in the room is that Israel is located in a hot spot for conflict, and is at the epicenter of the unpredictable nature of the middle eastern territories surrounding the area.
The good news is that in terms of its economic standing, this hasn’t affected the financial situation, and growth continues to stay consistent whilst the country has never defaulted. What this doesn’t take into account is a future political conflict, which sadly, is almost inevitable.
One thing to bear in mind is that there’s always a chance Israel will not be able to repay the debt obligation it accrues. If we look back over history, Israel has never missed a payment, and that includes multiple wars and conflicts that plague the region. But future problems stem from the potential spending of resources on more defense, as well as the possibility that local neighbors could block the international trade out of the country, which Israel prides itself on.
The other thing to take into consideration is the risk of inflation: buying power is almost certainly going to be impacted by inflation, and after-tax returns are almost regularly less than anticipated. This means that the total return will be compromised, as it cuts into net profit.
Another drawback is that Israel bonds lack liquidity, meaning they cannot be sold on a secondary market, whereas U.S. bondholders do have this option. Israel bonds prohibit this and you cannot sell to other investors, limiting their total value. In short, you shouldn’t invest in Israel bonds unless you are planning to hold these bonds to maturity.
The irony of all of this is that the USA gives over $3 billion to Israel in terms of foreign aid for military assistance, and funds their new equipment in the form of aircraft and firearms, and missile defense.
Regardless of the political motivations, a large sum of the returns will be via US taxpayer money, which ethically doesn’t sit right with everybody. Whereas if you have a vested interest in Israel that goes beyond the financial, such as family members that live there, attend university, or your own property, or even for philanthropic motivation. then this might be motivated to consider Israel bonds.
It also boils down to your goals and personality as an investor. If you can handle the volatile nature of the geopolitical landscape surrounding Israel and want to risk market volatility, you’ll do well to give Israel bonds the time of day. If you favor long-term stability and security, then a conservative approach may be best suited, or avoiding them all together might be the best approach as they are certainly not suitable for those ‘boring’ investments that accrue over years. Especially owing to the fact bonds are defined as a low-risk investment strategy.