Granger Causality Effect of Macroeconomic Factors on Treasury Securities Yields in Kenya

Abstract

Treasury securities are important financial instruments in any economy since their yields provide a benchmark interest rates for other securities. They are also key indicators of market expectations, risk perceptions and money conditions in an economy. Over the recent past years, Kenya has experienced unexpected great movements of the treasury securities yields which has presented a real risk to economic stability. Therefore, the main objective of this research is to determine the granger causality effect of macroeconomic factors on treasury securities yields in Kenya. The key macroeconomic factors considered in this research are inflation rate, monetary policy rate, Government debt and foreign exchange rate. This study finds that inflation rates significantly contribute more in explaining positive movements of short-term and medium-term treasury yields in Kenya. Similarly, monetary policy rates were found to have a significant, but relatively less, contribution in explaining negative movements of short-term and medium-term treasury yields in Kenya. Moreover, foreign exchange rates were significantly found to have more contribution in explaining positive movements of short-term treasury securities yields in Kenya. Finally, the study found that Kenyan government debt does not significantly contribute in explaining the movement of treasury security yields of all maturities in Kenya.

Keywords: Treasury Securities, Inflation Rate, Monetary Policy Rate, Government Debt, Foreign Exchange Rate, Granger Causality