Effect Of Selected Macroeconomic Variables On Government Bond Yields In Kenya

Abstract

Developing countries in Africa and other parts of the world contends with challenges of rising budget deficits beside hikes in the rates of interest and inflation. Therefore, issuance of bonds remains a critical area in deficit financing in Kenya and developing countries around the world. Bond markets offer an important source of capital to African Governments. Government bonds provide a means to secure investment to the public and organizations because payment is guaranteed by the fact that repayment of government debts is prioritized in the budgeting process. The study sought to evaluate the effect of selected macroeconomic variables on government bond yields in Kenya. The selected macroeconomic variables were government debt, inflation, interest rates, economic growth rate and money supply. The study was anchored on a descriptive research design. The data for the period 1985-2018 was obtained from the Central Bank of Kenya, National Treasury and Kenya National Bureau of Statistics. The study used Autoregressive Distributed Lag models to analyse data. Diagnostic tests included Augmented Dickey Fuller test for stationarity and Johasen Cointergration Tests for the long run relationship between variables. Econometric analyses included Bound Testing (F-statistic), Breusch-Godfrey Serial Correlation (Lagrangian Multiplier) Test for serial correlation, Wald Test and the Cumulative Sum Control Chart for stability of the ARDL model. The study established that government bond yield in Kenya was not significantly influenced by macroeconomic variables such as government debt, rate of inflation, interest rate, economic growth and money supply. The study recommended that government bonds should be an area of priority in the formulation of monitory and fiscal policies in the country and that government should embark on an expansive awareness creation programme on government bonds and the benefits that they hold as a mean to increasing bond yields. The main limitation of the study was to narrow down the area of focus to selected macroeconomic variables and bonds. The study recommended further empirical studies on the effects of other macroeconomic variables such as the rate of unemployment and government spending on government bond yield.