JERUSALEM (Reuters) – The Bank of Israel is studying whether to raise increase the equities holdings in its foreign exchange reserves portfolio and also invest in corporate bonds below investment grade, its deputy governor said on Sunday.
Speaking at a Euroclear conference, the central bank’s Andrew Abir said Israel’s forex reserves were about 60% invested in government bonds and 15% in stocks – mainly U.S. shares but also small amounts in the UK, France, Germany, Japan, Canada and other countries.
Though the COVID-19 pandemic has taken a heavy toll on global equities prices, Abir said the central bank has continued to manage its reserves with a long-term view.
Israel’s forex reserves stand at a record high of $161 billion, up from less than $30 billion in 2007. Until 2012 the reserves were invested largely in government bonds to maintain high liquidity.
However, Abir said the central bank now places greater emphasis on the portfolio’s yield, with about 7% invested in corporate bonds – the maximum allowed.
He said the Bank of Israel was looking at investing in additional assets, including a low level of corporate bonds that are below investment grade.
“While investment in volatile assets may lead to losses in the short term, the high level of the reserves makes it possible to absorb short-term losses without harming the Bank of Israel’s ability to provide foreign exchange to the economy at the required scale during emergencies or financial crises,” he said.
As such, “two of the aims of the investment policy for the reserves – security and liquidity – are met”, he said, adding that investment in more volatile assets makes it possible to benefit in the long term from the risk premium inherent in such investments and improves the yield on the reserves portfolio.
Empirical findings show that investment in equities generates a higher long-term yield than investment in government bonds, Abir said.
Reporting by Steven Scheer; Editing by David Goodman