Effect Of Macroeconomic Factors On The Performance Of The Bond Market In Kenya

Abstract

A predictable and stable macro-economic environment leads to a robust bond markets in a country. The main objective of the study was to determine the effect of macroeconomic factors on the performance of the bond market in Kenya. Specifically, the study sought to determine the effect of foreign exchange rate on bond market performance in Kenya; to assess the effect of interest rate fluctuations on bond market performance in Kenya; and to investigate how inflation rate affects bond market performance in Kenya. This study adopted a longitudinal research design. The population in this study constituted the entire bond market in Kenya. The population of this study was drawn from quarterly bond market Index data for a period of 10 years from 2007 – 2017. Secondary data was collected for the study. The researcher obtained quarterly data for the variables. This study used descriptive and inferential statistics to analyze the data. Data analysis was done using STATAv13. Diagnostic tests were done to establish whether the model and variables are significant. The data was presented in form of tables. The long run regression results showed that the effect of macroeconomic factors on bond performance existed. The VECM findings showed that there was a short run relationship between the macroeconomic factors and bond performance. There was a negative effect of exchange rate and interest rate on bond performance. However, inflation rate displayed a positive relationship with bond performance in the short run. This study recommends that policies on exchange rate and interest rate be observed closely to control the variables as they affect bond performance negatively. The study also recommends a strict monetary policy and control of factors contributing to change in inflation rate in order to enhance bond performance. This study recommends further studies to be done using other macro-economic variables to understand their contribution to bond performance in Kenya.