Effect of Treasury bill rates on stock market returns of companies listed in the Nairobi securities exchange.

Abstract

A country’s monetary policy dictates the amount of cash available for government expenditure or repayment of external debt. A reduction in money supply would trigger open market operations that enables the government to obtain the cash that it requires and one of the securities that can be used is Treasury Bills. Theoretically, Treasury bills are considered lucrative for risk averse investors hence being a competing security to the stock market. The aim of this paper was to understand the impact of Treasury bill rate on stock return of companies listed in the NSE. The research design employed was descriptive correlation design. Population was made up of companies trading at the NSE for duration of 4 years (January 2015 to December 2018). A sample of 20 companies that make up the NSE-20 index was purposively chosen and data used was secondary. Multiple linear regression carried out on the data to comprehend the relation between the variables. The study controlled for effect of exchange rates and inflation rate. Tests of significance were carried out on the data. The study noted that Treasury bill rate had a negative influence on stock market returns. Exchange rate was noted to have a positive influence on stock market returns. It was also noted that inflation rate had a negative effect on stock market returns. The coefficient of determination was found to be 24%. Analysis of variance identified Treasury bill rate, exchange rate and inflation rate collectively significantly influenced stock market returns at the 5% level of significance. The study reached the conclusion that Treasury bill rate and stock market return for listed firms are significantly inversely related and are competing investment products. It also concluded that increases exchange rate caused stock returns to increase significantly. Further, the study concluded that increase in inflation rate caused stock market returns to decrease but the decrease was not significant. Finally it was concluded that variation in T-bill rate, exchange rate and consumer price index explained 24% of the variation in stock market return. The study recommended that investors and portfolio managers should tilt their portfolio allocation towards stocks when there is an expectation of T-bill rate to go down and toward T-bill when there is an expectation of T-bill rate to rise. The study also recommended increasing exposure to the stock market when exchange rates are rising as the stock market is expected to perform better in these periods. In addition the study recommends selling of stocks when the inflation rate is expected to be rising to avoid loss in expected returns. Finally, the study recommended higher T-bill rate by the Central banks’ monetary policy when seeking to reduce liquidity in the market. Further research may focus on investigating the mechanism through which Central Bank monetary policy is transmitted to the stock market. Researchers may also seek to evaluate the role of monetary policy in securities market development especially for developing economies.