What shifts the bond demand curve?
• A change in wealth. As wealth increases, people will buy more bonds at each and every price, and the demand for bonds rises, or shifts right. So when an expanding economy increases both income and wealth, we expect bond demand to increase too. • A change in expected interest rates/returns. For bonds with more than a year to maturity, rising interest rates in the future will decrease the value of the bond (and hence the expected return). At each and every price, fewer bonds will be demanded. Bond demand will fall, or shift left when expected future interest rates fall. The size of the decrease will be larger for longer term bonds. • A change in expected inflation. If investors expect the inflation rate to rise, then they expect the real return on their bond to fall, as future payments are able to buy less. Higher inflation expectations decrease bond demand. • A change in the relative risk of bonds. At any given price or expected return, if bonds become riskier than other assets, peopl
