Exchange Rate Growth and Sovereign Treasury Bond Yield Curve Movements in Kenya

This paper investigates the dynamic relationship between exchange rate movements and long-term sovereign treasury bond yield curve dynamics in Kenya, with particular emphasis on the moderating role of monetary policy. Using quarterly data and a Vector Autoregression (VAR) framework, the study examines both direct and indirect transmission channels through which exchange rate shocks influence government bond yields. Unit root tests confirm that all variables are stationary in levels, justifying estimation of a VAR (1) model. Empirical results indicate that exchange rate shocks do not exert a strong immediate effect on bond yields; instead, their influence is transmitted indirectly through monetary policy responses, as reflected in adjustments to the Central Bank Rate (CBR). Impulse response analysis shows that exchange rate depreciation induces a tightening monetary policy stance, which subsequently affects yield curve movements. The findings underscore the importance of exchange rate stability and credible monetary policy coordination in managing sovereign borrowing costs in emerging market economies.

Exchange Rate; Sovereign Bond Yields; Monetary Policy

1. Agenor, R. P., Alper, K., & da Silva, L. P. (2018). Capital regulation, monetary policy, and financial stability. 32nd issue (September 2013) of the International Journal of Central Banking. [Google Scholar] [Crossref]

2. Aizenman, J., Cheung, Y. W., & Qian, X. (2020). The currency composition of international reserves, demand for international reserves, and global safe assets. Journal of International Money and Finance, 102, 102120. [Google Scholar] [Crossref]

3. Aruasa, I. (2024). Assessing the Determinants of Bond Liquidity in Kenya: The Impact of Interest Rates and Exchange Rates. [Google Scholar] [Crossref]

4. Bianchi, J., Hatchondo, J. C., & Martinez, L. (2018). International reserves and rollover risk. American Economic Review, 108(9), 2629-2670. [Google Scholar] [Crossref]

5. Clarida, R., Galı, J., & Gertler, M. (2002). A simple framework for international monetary policy analysis. Journal of monetary economics, 49(5), 879-904. [Google Scholar] [Crossref]

6. Effiong, U. E., Arinze, N. P., & Okon, J. I. (2022). Monetary and fiscal policy interactions and exchange rate movements in Nigeria. International Journal of Novel Research in Marketing Management and Economics (IJNRMME), 9(2), 46-64. [Google Scholar] [Crossref]

7. Hausmann, R. (2016). Economic development and the accumulation of know-how. Welsh Economic Review, 24, 13-16. [Google Scholar] [Crossref]

8. Hernandez, J. (2018). How international reserves reduce the probability of debt crises. [Google Scholar] [Crossref]

9. Hofmann, B., Shim, I., & Shin, H. S. (2020). Bond risk premia and the exchange rate. Journal of Money, Credit and Banking, 52(S2), 497-520. [Google Scholar] [Crossref]

10. Leshoro, T. L. (2020). Monetary policy or fiscal policy, which one better explains inflation dynamics in South Africa?. African Journal of Business & Economic Research, 15(1). [Google Scholar] [Crossref]

11. Miyajima, K., Mohanty, M. S., & Chan, T. (2015). Emerging market local currency bonds: diversification and stability. Emerging Markets Review, 22, 126-139. [Google Scholar] [Crossref]

12. Ngaruiya, M., & Njuguna, A. (2016). Effect of Exchange Rates on Bonds Prices: A Survey of Bonds Listed At the Nairobi Securities Exchange. American Journal of Economics, 1(2), 16-32. [Google Scholar] [Crossref]

13. Ozcelebi, O. (2019). Assessment of asymmetric effects on exchange market pressure: Empirical evidence from emerging countries. The North American Journal of Economics and Finance, 48, 498-513. [Google Scholar] [Crossref]

• Financial Technology (Fintech): Current Research at The Cutting Edge
• Reforming Corporate Governance in Malaysia to Address Fraudulent Financial Reporting Cases
• Stock Market Efficiency and Economic Diversification in Nigeria and South Africa
• Financial Stability and Financial Performance of Small and Medium Tiered Deposit Taking Savings and Credit Cooperatives in Kenya.
• Regulator Sandboxes for DeFi: A Comparative Analysis of Policy Effectiveness in the EU, US, and Asia Pacific