What shifts the bond supply curve?
• A change in business conditions. Firms issue bonds to finance the purchase of capital equipment and the expansion of production. This makes sense only if this expansion is expected to be profitable. As economic conditions become more favorable, expected profitability rises and bond supply will increase or shift right. Also tax incentives for borrowing can also be considered a business condition. • A change in expected inflation. While rising inflation decreases the real return for those who buy bonds, it decreases the real cost of borrowing for those who issue bonds: For a given nominal interest rate (and bond price), higher inflation means a lower real interest rate. Thus, higher expected inflation increases bond supply. • A change in government borrowing. If the government runs budget deficits, the U.S. Treasury must issue additional bonds to finance the shortfall in tax revenue. At each and every bond price, the quantity supplied increases, so the bond supply curve shifts right. C
