In Economics, what factors might increase the demand for bonds? What factors might increase the supply of bonds?

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kipling2448 | (Level 3) Educator Emeritus

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Factors that might increase the supply of bonds are easier to conjure than those that might increase the demand for those particular financial instruments. Bonds are tools used by governments and corporations to raise money. They are borrowing from the public for short term reasons in exchange for repaying with interest at a specified future date -- a date as far as ten years into the future in many cases. Governments and corporations, therefore, decide to issue or sale bonds because they generate revenue. The need for that revenue could be grounded in an unacceptable level of accumulated debt, or as a way of funding projects, such as infrastructure improvements, without raising taxes. Governments might issue bonds to finance such infrastructure improvements as road improvement and construction or for the construction of new schools or prisons. 

Now, why would consumers or governments decide to purchase bonds issued by others? In the case of individual consumers, savings bonds are routinely purchased as a means of facilitating long-term savings, such as for a child's future college education. Bonds are a low-risk, low-yield means of ensuring such savings. Governments or organizations might decide to purchase bonds as a way of influencing interest rates. Because governments, especially that of the United States, borrow money, they have a substantial interest in the rates at which loans are negotiated. The level of the United States's debt is so large (currently $18 trillion) that just paying off the interest on that debt amounts to hundreds of billions of dollars per year. With such a vested interest in the rates at which is money is borrowed, the United States finds attractive the notion of purchasing bonds in the hopes of forcing down interest rates. These, then, are factors that might increase the demand for bonds.

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