Determinants of Kenyan government bond yields

Abstract

Government bond yield is a critical area of knowledge for both bond investors and the government. The rate of return of the government bond is crucially beneficial to the investor,since it is the rate of return on their investment. On the other hand, the government needs to be aware of the trends in its yield to be able to price any new issuance of bonds appropriately. Most developing countries are characterized with ever increasing national budget deficits coupled with rising rates inflation besides escalating interest rates. It is so true that most developing countries are issuing Treasury bonds on monthly basis and the Kenyan government is not exempted from this category.This study had sought to establish the determinants of the Kenyan government bond yields. For the purpose of this study, bond yield is the rate of interest that a bond attracts. This study had the following specific objectives;to establish the effect of a national budget deficit on yield of the Kenyan government bonds, to find out the effect of inflation on yield of the Kenyan government bonds and to assess the effect of interest rates changes on the yield of Kenyan government bonds. This study is of significance to other researchers who will use it as a basis of further research and data governing, fiscal policies makers in the government in deciding on bond pricing and the government bond investors in bond purchasing decisions. This study used secondary data available from the Central Bank of Kenya and the Kenya National Bureau of Statistics. The study adopted a time series analysis research design with regression model. The study had a target population of -Kenyan government bonds that have been in trade from year 1985-2015. This study adopted regression analysis in order to answer the research questions. This study had sought to establish the degree of association between the determinants considered and government bond yields. Data was analyzed using SPSS. Data was presented in frequency tables and inferences made.