Question

What are three factors that can cause the supply curve for bonds to shift ? Explain briefly these two factors

Answer 1

There can be many reasons for shift in bond supply curve, but the three main ones are government budgets, inflation expectations, and general business conditions.

i) Government budgets:-

Budget deficit, Goverment often borrows by selling bonds, thus pushing the supply curve rightward and bond prices down (yields up).

Budget surplus, Government redeems and/or buys their bonds back on net, pushing the supply curve to the left and bond prices up (yields down), all else being equal.

ii) General business conditions:-

Borrowing also becomes more attractive when general business conditions become more favorable, as when taxes and regulatory costs decrease or the economy expands.

Also,most of the economic entities borrow out of strength, to finance their expansion and engage in new projects they believe will be profitable.

So when the economic prospects are favorable, taxes are low, and regulations are not too costly, businesses are keen to borrow, often by selling bonds, shifting the supply curve to the right and bond prices down (yields up).

Since the question asked to explain only two of them, hope they are clear.