Yield Curve Estimation and Inflation Calculation
Are you weighing what the rate on the variable-rate or prime-linked loans in your mortgage mixture will be? You need to make assumptions about how these indices will change in the future. If you don't, you're effectively taking an "it'll be fine" approach — and we believe that's an approach you must not take when planning your mortgage.
The right way to assess changes: yield curve estimation
The model we use to estimate the yield curve is based on academically researched approaches used by governments, central banks, and financial institutions around the world.
These estimation methods rest on the efficient market hypothesis. Under that hypothesis, the price of Israeli Government bonds in the capital market — that is, the Tel Aviv Stock Exchange (TASE) — already reflects all the existing, available information about government activity and, by extension, about the State of Israel.
The best estimate of inflation expectations, prime-rate expectations and expected changes in the bond anchors lies in the Israeli Government bonds traded every day on the Tel Aviv Stock Exchange (TASE). Here are examples we will cover shortly:
- Inflation outlook: The difference between the yield on a nominal (NIS) government bond and the yield on a CPI-linked bond for the same time horizon reflects market inflation expectations.
- Prime-rate change outlook: Short-term bond yields (one to two years) reflect expectations for near-term Bank of Israel interest rate decisions. A sharp rise hints at an expectation of a rate hike and a rise in the prime rate, while a fall hints at the opposite.
A line is drawn through all the data points (for which bond data exists), producing a curve that shows yields for any time horizon we want.
📊How to build the yield curve
The process of building the yield curve looks like this:
The first step is to obtain the latest trading data for Israeli Government bonds, which are traded in the capital market and whose information is published on the TASE website.
The data can be obtained from the TASE website.
We are interested in two parameters: yield to maturity, and maturity date.
Maturity date: The date on which the bond reaches the end of its life. On that date, for each bond we held we will receive back 100 agorot (per ₪100 face value).
Gross yield to maturity: The return on our investment if we hold the bond from today until the end of its life — the maturity date. From this yield we then need to subtract taxes and fees.
Gross Yield to Maturity of Israeli Government Nominal Bonds
As of 12 June 2026
OK, if you have a feeling there's some pattern here and that a single line might actually pass through all the points — you're right!
The line we're about to add is called the yield curve. The yield curve is very valuable information because it lets us estimate the yield at points in time for which no bond exists. Suppose, for example, that we want to know what yield to maturity we could get by investing in a CPI-linked Israeli Government bond for 13.9 years. Since no such bond exists, we can estimate the yield to maturity using the yield curve.
Yield Curve Interpolation Between Bond Points
First aside: There are two very common approaches to building the line. The first approach is to build it using the Nelson-Siegel-Svensson curve (or just Nelson-Siegel). This method is used by the central banks of Belgium, France, Italy, Switzerland, and others. The second approach uses a smoothed spline. Each central bank picks the method that suits it — here's a paper that reviews each bank's choice. Following the mortgage reform, the Bank of Israel adopted a new methodology that combines the two approaches above.
Second aside: All of these analyses really ought to be done using an asset called a "zero-coupon bond," but for simplicity we'll continue the explanation with the yield curve. We use the yield curve rather than zero-coupon bonds because yield curve data is published at any given moment, whereas zero-coupon bond data is updated only twice a month by the Bank of Israel.
OK, now that we have the curves, we have everything we need to say what the changes in inflation, in the Bank of Israel interest rate, and in the variable-rate tracks will be, according to efficient market theory.
How to estimate inflation from the yield curve
If I need to borrow money and repay it in two years' time, who should bear the inflation risk — me or the bank lending me the money? If inflation runs high and I've agreed to make CPI-linked payments, my monthly payment goes up. And if inflation runs low, I come out paying a lower interest rate.
These questions point to a connection between inflation, the level of the real interest rate (the CPI-linked one) and the level of the nominal interest rate (the one that isn't CPI-linked).
The American economist Irving Fisher (1867-1947) developed this connection into the Fisher equation, which links the three together.
Fischer equation:
r - real interest rate
i - inflation rate
n - nominal interest rate
In other words, multiplying the real interest rate by projected inflation gives us the nominal interest rate.
If what we care about is inflation, then by expanding the Fisher equation, dropping the small product of inflation and the real interest rate, and solving for inflation (i), we find that projected inflation is the difference between the nominal interest rate and the real interest rate. So if we take the nominal yield curve and subtract the real yield curve from it, we get inflation according to the Fisher formula. This figure is called break-even inflation.