Bond Liquidity, Order Flow, Information Efficiency and Yields of Treasury Bonds in Kenya

Abstract

Treasury bonds are secure units of government debt, they offer medium to long-term investment to traders. Auctioned by the Central Bank of Kenya (CBK) on monthly basis. Government of Kenya in quest to promote economic growth and sustainability of financial system, designed and implemented policies that created regulatory organ. Implementation of debt-restructuring program meant to reduce the pressure on interest rates arising from frequent rollover of maturing securities and to develop a reliable yield curve to guide pricing at the primary and secondary markets. CBK reported that the reforms would eventually promote liquidity and stabilize the bonds yields. Bonds yields in Kenya are erratic and unpredictable making it of interest to establish what the cause. Scholars have attempted to explain factors that drive yields of treasury bonds and they have failed to reach to a consensus. Researchers have ascertained that bond liquidity influences the bond yields while others have found that liquidity has insignificant impact on yields. It was paramount to introduce the order flow and information efficiency as moderators to test their effect on the relationship between the bond liquidity and yields of Treasury bonds in Kenya. The general objective of this study was to determine the relationship among the bond liquidity, order flow and information efficiency on bond yields of treasury bonds in Kenya. This study adopted descriptive, correlational and longitudinal research designs to collect measure and analyze the data for 10 years period beginning January 2009 to December 2018. Fixed Effects Model and Random-effects regression analysis were used to test the formulated null hypothesis of the study. The study found out that bond liquidity was a significant predictor of bond yields. Bond liquidity accounted for the variance in bond yields of treasury bonds in Kenya. Order flow and Information Efficiency had a moderating effect on the relationship between bond liquidity and Bond yields of treasury bonds in Kenya. The bond liquidity had a negative relationship with yields of treasury bonds. The joint analysis established that order flow was statistically insignificant predictor of bond yields. Though the order flow and information efficiency as standalone moderators positively influenced the Treasury bond yields and were statistically significant. It was also established that the moderators had caused big variance in treasury yields as compared to effect of individual variables. This study contributes to the existing knowledge in academia and provides insights into the Treasury bond market. It assessed adequacy of the existing literature, theory and identified gaps that may serve as guide to future research. The combination of order flow and information efficiency strengthened the relationship between bonds liquidity and yields. It is crucial to policy makers concerned with financial development in Kenya. The study recommend the central bank of Kenya to engage the Nairobi Securities exchanges and design good policies that could increase trading of treasury bonds at the secondary market. To deepen the Treasury bond market and promote financial inclusion, the study recommended policy shift and improvement of understanding of the available government bond products and improved customer care practices that would increase trading and trader’s subscription.