Factors Influencing the Liquidity of Secondary Bond Market in Kenya

Abstract

Ihc study uses time series datu in a multivariate OLS model to determine the factors that influence bond liquidity in the secondary bond market in Kenya based on the internal characteristics of bonds and macro economic factors- The results show that bank lending interest rate, foreign exchange rate, savings interest rate and domestic debt arc factors that influence the turnover of bonds and by extension its liquidity. Our findings suggest that to improve on liquidity, appropriate fiscal and monetary’ policies should be employed to encourage trading in Ihc secondary bonds market. We suggest that such policies should be applied to manage the volatility of interest rate and exchange rate to improve on liquidity of the bonds and also to encourage borrowing using debt instruments to spur growth of the productive sectors through investment. The monetary authority should also create incentives to encourage investors to trade In the secondary market in debt instruments rather than buying and holding securities to maturity.