The relationship between selected macroeconomic Variables and bond yield: Evidence from the Nairobi securities exchange

Abstract

The financial sector plays a crucial role in economic development. A well functioning capital markets increases economic efficiency, investment and growth. Kenya’s capital market is described as narrow and shallow. The stock and bond market have been raising less than 1% of growth financing. The vision 2030 development plan targets an annual economic growth rate of 10% with an investment rate of 30% to be financed mainly from mobilization of domestic resources. This has led to significant focus on the capital market with the institutional development of the stock market and introduction of new instruments in the bonds market. On the other hand, the economic environment is generally unstable and unpredictable. The relationship between macroeconomic variables and capital market development has been a subject of interest to both academicians and practitioners. The price movement of company’s securities is dictated by certain fundamentals specific to that organization. However, it is believed that government economic policy and macroeconomic variables such as; interest rates, inflation rates, Gross Domestic Product (GDP), GDP growth rates and exchange rates, that are external to organizations have a significant influence on the movement of security prices. The study seeks to establish the relationship between bond yield to maturity and selected macroeconomic variables in Kenya for a five year period from January 2007 to December, 2011. The study uses bond yield to maturity as a measure of bonds performance. On the other hand, inflation rates, exchange rates, GDP growth rates and interest rates are the selected macroeconomic variables for the study. The relationship between bond yields to maturity and the selected macro economic variables are analyzed using the multiple regression models. Data for the study was obtained from: NSE quarterly reports, Central bank of Kenya reports and publications, annual economic survey reports. It is evident from the literature reviews that macroeconomic variables have a significant influence on the performance of bonds. The finding of the study indicates that macroeconomic variables do not a have a significant influence on performance of bonds. However, policy makers should develop vi and implement prudent macroeconomic policies that will promote development of the capital market in Kenya particularly the bonds market.