The effect of selected macro-economic variables on bond market development in Kenya

Abstract

This study sought to investigate the effect of selected macro economic variables on bond market development in Kenya. Studies done have focused on the corporate bond market and given that the bond market in Kenya is still modest and under developed in breadth and depth as compared to the banking sector and even more mature bond markets such as the US. There was need to carry out this study. A causal research design was used to find out the effect of macroeconomic variables on bond market development. Secondary data for the period 2008-2012 was used to model the macroeconomic factors influencing development of the bond market. The entire bond market which comprised fifty six treasury bonds, twenty corporate bonds and five infrastructure bonds was covered. Data was analyzed using descriptive and regression analysis. Bond market development being the dependent variable was analyzed against seven macroeconomic variables (independent variable) which were economic size, exports, banking system size, interest rate spread, exchange rate variability, fiscal policy, and gross domestic product per capita. Coefficient of determination was used to measure the strength of each variable versus bond market development. ANOVA was used to interpret the significance of the relationship. The study found out three macroeconomic (bank size, exports and fiscal policy) had no effect on bond market development. Three macroeconomic variables (exchange rate, interest rate and gross domestic product per capita had a positive effect on bond market development. However, economic size measured as gross domestic product at purchasing power parity had a negative effect on bond market development. It can therefore be concluded that exchange rate, interest rate, gross domestic product per capita and gross domestic product at purchasing power parity do affect bond market development. The study, therefore recommends that more focus should be given, on the four main variables identified by the policy makers in order to spur more growth in the bond market. A further investigation would be necessary in order to establish the effect of other macroeconomic and institutional variables not covered by this study.