Foreign exchange rate movement and long-term sovereign bond yield curve movements in Kenya

Abstract

The primary aim of this study was to examine the effect of exchange rate movements on Kenyan government treasury bond yields during the period 2002-2022. The study utilized monetary policy to assess its moderating effect on the relationship between the dependent and independent variables. Data for this research was obtained from secondary sources, including the Kenya National Bureau of Statistics, the Central Bank of Kenya, and Thompson Reuters, as all variables considered were only available through these sources. Using quarterly data spanning 20 years (2002-2022), amounting to approximately 80 observations, the analysis was conducted with E-Views 12 based on the study's objectives. Descriptive statistics summarized the data, while correlation and multiple regression analyses examined the relationship between government bond performance and exchange rate movements. Prior to analysis, stationarity tests and other diagnostic procedures were performed. The results indicated a significant impact of exchange rate movements on 20-year government bond yields. An increase in the exchange rate was associated with a positive change in bond yields, suggesting that currency fluctuations can influence bond yields, potentially reflecting the effects of currency movements on investor behavior in the bond market.