The main objective of the study was to determine the relationship between macroeconomic variables and government bond yields listed on the Nairobi Securities Exchange (NSE). The specific objectives were to investigate the impact of the inflation rate, economic growth rate, foreign direct investment (FDI), and exchange rate on government bond yields listed on the Nairobi Securities Exchange (NSE). The study adopted a quantitative research design and utilized secondary data on nineteen,15-year Kenyan government bonds listed on the NSE from the 1st quarter of 2007 to the 1st quarter of 2023, that is a sixteen-year period. The analysis focused on yearly yield variations over the maturity period of the bonds using data obtained from the Central Bank of Kenya, Kenya National Bureau of Statistics and World Bank. The Vector Error Correction Model technique was employed to identify the long and short run relationships between the macroeconomic factors and government bond yields in EViews. Diagnostic tests included the Augmented Dickey Fuller test and Johansen Cointegration Tests; to test for stationarity and long run relationship between variables respectively. Lag selection was carried out and an optimal lag of 1 was selected based on the Akaike information criterion (AIC) and Schwarz information criterion. VECM was found to be the most suitable model since all the time series data of the variables was found to be stationary upon first difference and there was presence of at least one cointegrating equation. The study established government bond yields were significantly affected by Foreign Direct Investment, Exchange Rate, and Inflation Rate on the long-term while on the short-term the government bond yields were only affected by the inflation rate. The study also established a positive relationship with inflation rates both in the long and short run. The FDI and Exchange Rate exhibited a positive significant impact on the long run only. Economic growth did not exhibit any long run and short run relationships at five percent significance level. The research proposed that it is crucial to prioritize government bonds when developing both monetary and fiscal policies within the nation. Additionally, it suggested that the government should initiate an extensive awareness campaign regarding government bonds and their associated advantages as a strategy to boost bond yields. The primary constraint of the research was its focus on specific macroeconomic variables and bonds. To address this, the study suggested the need for additional empirical investigations into how other macroeconomic factors, like unemployment rates and government expenditures, impact government bond yields.

Keywords : Government Bond Yields, Inflation Rate, Economic Growth Rate, Exchange Rate, Foreign Direct Investment, Cointegration, Vector Error Correction Model, Stationarity.