Which factor could increase the demand for bonds?

When considering factors that could increase the demand for bonds, lower interest rates stand out as a key contributor. When interest rates decrease, the existing bonds with higher coupon rates become more attractive to investors, as they offer better returns than new bonds issued at lower rates. This dynamic drives up demand for those existing bonds, as investors seek to lock in the higher yields.

Additionally, as interest rates fall, the overall cost of borrowing decreases, which can encourage more investment into bonds as they are perceived as safer assets compared to stocks, especially in uncertain economic times. This tends to shift more investors towards bonds, increasing their overall demand.

Other factors mentioned might lead to decreased demand, such as decreased household wealth, which would typically reduce the funds available for investment, or increased expected inflation, which can erode the purchasing power of fixed-income returns. Reduced government borrowing could also shift the landscape of available bonds, but it does not inherently increase demand for existing bonds in the market. Thus, lower interest rates clearly represent a condition that enhances bond demand.