Jan 27, 2024 - Economy

How diaspora bonds helped Israel after the Hamas attack

Data: Bradley, De Lira, & Gulati, 2024; Chart: Axios Visuals
Data: Bradley, De Lira, & Gulati, 2024; Chart: Axios Visuals

Israel's longstanding cultivation of its global diaspora as a source of funds paid off last quarter, as Jews around the world kept on lending the country money at much lower rates than the commercial markets.

Why it matters: Both Israel and many of its investors are sophisticated players of the arbitrage between debts issued to different types of bondholders. (Traders need not apply: The diaspora bonds are non-tradable.)

How it works: Bonds issued to the Jewish diaspora — carrying names like "Maccabee," "Mazel Tov," and "Shalom" — have historically yielded slightly more than the rates available to the state of Israel in the international bond markets.

  • That might be because of their illiquidity, but it is also a little surprising, given that, as the University of Virginia's Douglas Mulliken has demonstrated, they are structurally senior to the country's commercial debt.
  • As a result, gentile investors including Warren Buffett have also shown a strong interest in the program.

The big picture: A new paper from law professor and sovereign debt savant Mitu Gulati and two of his colleagues shows not only how the spread between diaspora and commercial rates has changed over time, but also how years of goodwill allowed the country to raise money from its diaspora at well below commercial rates, after those yields spiked following the Hamas attack on Oct. 7.

  • By the numbers: In the second half of October, diaspora bonds were being successfully issued at 5.5%. Meanwhile, conventional bonds were trading at a yield of 7.4%, almost two full percentage points higher.
  • Flashback: A similar, if smaller, inversion happened after the pandemic hit in early 2020.

Between the lines: Diaspora investments can be seen in the stock market as well as the bond market. Value-focused hedge fund manager Bill Ackman and his wife, Neri Oxman, spent about $25 million to buy a 4.9% stake in the Tel Aviv stock exchange this week.

  • The investment "represents our support for Israel," the couple said in a statement.

The bottom line: Many countries have tried to tap their diasporas for funds. Israel is by far the biggest success story.

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