The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time.

The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said.

“The basis for the decision to invest in equities is the expected equity-risk premium over bonds,” Saadon wrote in an e-mailed response to questions. “The goal of this move is to improve the return-to-risk ratio of the reserves.”

Central banks around the world are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Banks’ foreign-exchange holdings have increased by about $8.5 trillion globally in the past decade, exceeding levels needed for day-to-day currency administration.

In a survey of 60 central bankers by Central Banking Publications and Royal Bank of Scotland Group Plc released last month, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the world’s second-biggest reserves after China, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($36 billion) by 2014.

European Allocation

The Bank of Israel bought equities for the first time in March of last year, according to Saadon. The initial purchases were made through UBS AG and BlackRock Inc. The bank’s investments are in passive funds tracking broad MSCI indexes, including companies like Apple Inc.

“There has been talk for a long time that they needed to diversify out of Israel,” said Uri Landesman, president of New York-based hedge fund Platinum Partners, which manages about $1.2 billion. “I’m not thrilled with the European equity market this second, but when a central bank makes a move like this, it’s not a day trade. They’re not going to reverse themselves overnight.”

The Israeli institution joins the the Swiss National Bank in buying shares this year. The Zurich-based SNB’s stock portfolio rose to 15 percent of assets last quarter, from 12 percent at the end of last year, according to data released yesterday on its website.

The Standard & Poor’s 500 Index closed at an all-time high of 1,597.57 yesterday, bringing its advance this year to 12 percent. The Stoxx Europe 600 Index climbed 6.1 percent in the same period. Investors have earned 0.8 percent owning U.S. government debt repayable in one year or more, according to Bank of America Corp. bond indexes.