Niccolo Rescia

This paper examines how droughts and floods affect Kenya’s domestic debt market between 2000 and 2024. Combining monthly issuance data for Treasury bills and bonds with disaster and macro-fiscal records, we estimate the dynamic effects of climate shocks on borrowing costs, issuance, and transmission channels. Droughts significantly raise long-term borrowing costs; Treasury bond yields rise by about 200 basis points within seven to eight months, while floods cause short-lived spikes in short-term rates and liquidity tightening. Issuance volumes show no consistent adjustment, suggesting that prices rather than quantities absorb climate stress. Fiscal responses appear muted, indicating that financial rather than fiscal channels dominate. These findings imply that climate risks are already embedded in Kenya’s domestic financing conditions. As such shocks intensify, debt managers should integrate climate risk into issuance strategies, enhance transparency, and strengthen liquidity support mechanisms.