(Bloomberg) --

Israel’s currency traded at the strongest level in more than a month after Prime Minister Benjamin Netanyahu said he’ll delay a controversial plan to weaken the judiciary “to avoid a civil war.”

The shekel rose 1.5% to 3.5309 against the dollar, the highest since Feb. 16, as of 1:38 p.m. in Jerusalem. The yield on Israel’s 10-year local-currency bond fell three basis points to 3.73%, adding to a 17-basis-point drop from Monday, with Deutsche Bank AG’s strategists turning positive on the nation’s debt. 

Netanyahu’s climbdown appeared to calm investor nerves after three tumultuous months of unrest sent the shekel reeling to a three-year low and prompted Moody’s Investors Service and other credit assessors to warn of risks to Israel’s debt rating. 

Netanyahu will need to achieve a negotiated agreement or abandon the rest of the proposals for Israel’s assets to fully rebound, even though Monday’s “developments are a baby step in the right direction,” according to Wells Fargo Securities. 

Anti-government protest leaders have vowed to press on with their campaign. Groups of demonstrators — both in favor and against the proposed overhaul — clashed with police overnight. 

Underscoring the anxiety, derivatives traders on Tuesday added to their bearish wagers on the currency, according to one-month risk reversals.

In the equities market, the key TA-35 Index slipped 0.3% after advancing 2% on Monday. The yield on the nation’s dollar bond due January 2033 rose about two basis points to 4.53%. 

“There is still a ways to go before political risk materially eases and Israel’s asset prices can recover,” said Brendan McKenna, a New-York based emerging-markets economist and foreign exchange strategist at Wells Fargo Securities. “In the short term, local markets can tread water, but may be impatient to see whether further momentum can be achieved.”

Israel’s bond yields are set to fall and the shekel will likely strengthen toward 3.45 per dollar in the coming months should political risk ease, he said. The currency is climbing for a seventh day, its longest winning streak since October 2021.

Deutsche Bank Research already finds value in the nation’s local bonds, upgrading its recommendation to “modest overweight” from “neutral,” strategists including Christian Wietoska wrote in a report. Concerns over the political turmoil, price pressures and the prospect of further monetary-policy tightening have contributed to the bonds’ underperformance in emerging markets this year. 

“We believe that a lot is now priced into local bonds, and therefore recommend a structurally more bullish bias,” the strategists said.

(Adds comments by Deutsche Bank in second and last paragraphs; updates prices throughout)

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