The development of the bonds market widens the financing options for firms and enables the government to shift its domestic debt to longer-term securities. However, the development of bond market requires that certain conditions be in place. These include a developed money market, wider participation and protection of investors, reduced information asymmetry and an efficient trading system. This would boost the market microstructure and facilitate the development of the market. The level of development of Kenya’s bonds market indicates that the country is very far from developing this market. The length of treasury bonds market is shorter than that of developed bonds markets, the trading system is not harmonized with intermediaries using different pricing models, and the regulatory framework is also weak to accommodate diversification of corporate bonds. Also, the growth of corporate bonds is yet to pick momentum, and the debt market is thin, with the type of securities that have negative implications on the competitiveness of the market. There are also gaps between the regulatory framework and the objectives of bonds market development. Thus, developing the bonds market requires huge investment in institutional building.

The 1980s and 1990s have seen developing countries embark on revitalizing capital markets to enhance the mobilization of long-term capital. The evidence that long-term capital is positively related to economic growth has justified this effort. Further, the recent need to meet the Millennium Development Goals (MDGs) demands the mobilization of adequate financial resources, and this has kept the momentum for capital market development high. Kenya has followed suit in developing its bonds market in the capital market reform process. Although treasury bonds were introduced into the market in the early 1980s, the market faced various challenges that constrained its development. Until 2001 when the government took a deliberate effort to shift domestic debt to long-term instruments, government bonds maturities were short. Corporate bonds were introduced in the mid-1990s, but the growth momentum was not maintained. Ten years after the first bond was listed, there are less than ten corporate bonds listed in the market. Further, the demand to diversify the bonds with mortgage-backed bonds among the banking institutions and infrastructure bonds has not been successful.