Israeli Bond Yields Rise as Election Stalemate Leaves No Clear Winner

Israeli government bond yields climbed on Wednesday after partial election results showed Prime Minister Benjamin Netanyahu’s bloc falling short of a majority, leaving investors uncertain about the path to a stable government.

Market data indicated a broad retreat from local assets. The Tel Aviv 35 stock index dropped 2.7%, while the Israeli shekel lost 1% of its value against the U.S. dollar. Bond yields rose across the curve, with the 2-year note adding 6 basis points and the benchmark 10-year note increasing by 4 basis points. The 30-year bond yield also edged up by 2 basis points.

Partial results from the 120-seat Knesset show Netanyahu’s camp projected to win 56 seats and challenger Gadi Eisenkot’s camp winning 48 seats. Arab-led parties, which belong to neither major bloc, are projected to secure 16 seats. These figures reflect counts from over 66% of ballots. The Central Elections Committee reported a turnout of 77.7% among eligible voters, the highest recorded in a Knesset election in 27 years.

Eisenkot, a former military chief of staff, declared victory earlier in the day. He stated that preliminary results indicating a slight lead for his bloc should grant him the first opportunity to form a government. "The initial exit poll results indicate a complete lack of confidence in Netanyahu and his October 7 government," Eisenkot said in a statement on X. Official results are scheduled for release on Nov. 4.

Forming a government typically requires a coalition of 61 seats, a threshold neither bloc currently meets. The president will ask a Knesset member to attempt to build a majority. If negotiations fail, Israel may face another election. The vote serves as a referendum on Netanyahu’s leadership following the wars in Gaza, Lebanon, and Iran that began after the Oct. 7, 2023 Hamas attack.

Arab-led parties are positioned as potential kingmakers in coalition talks. Mansour Abbas, leader of the Ra'am party, stated that "our vote will change the government." Ahmad Tibi, chairman of the Joint List faction, outlined plans to prevent Netanyahu from retaining power. Experts note that these parties’ pro-Palestinian stance aligns them more closely with Eisenkot, although neither major leader has explicitly embraced them yet.

Avigdor Liberman, leader of the Yisrael Beytenu party, refused to rely on Arab parties during the campaign. His party is projected to win between seven and nine seats and currently sits in the opposition bloc with Eisenkot. Netanyahu warned of high Arab participation, a move opponents accused of being racist. "If we don't wake up now, we'll find ourselves with a government of Mansour Abbas and Ahmed Tibi," Netanyahu said.

Analysts expect a prolonged negotiation process. Michael Feller, chief strategist at Geopolitical Strategy, noted that Eisenkot’s alliance is less likely to form a majority without including Arab and left-wing parties. Amin Saikal, an adjunct senior fellow at Singapore’s S. Rajaratnam School of International Studies, suggested Netanyahu may use the coming months to stall government formation to fight for his political survival. P.R. Kumaraswamy, an emeritus professor at Jawaharlal Nehru University, added that it is too early to write Netanyahu off.