Why do banks buy bonds when it reduces money supply?

They are lending money - bonds are loans Bonds pay interest. Thus they are lending and getting a return. Obviously some bonds pay better rates than others depending on the bond. read more

First, when the Board of Governors of the Federal Reserve, an agency of the US government, decides to reduce the money supply (and increase interest rates), the bonds are sold in what is called Open Market Operations by the NYC Federal Reserve Bank to “Wall Street” firms. read more

Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system. To learn more about central banks and their role in monetary policy, check out Formulating Monetary Policy. read more

** QE can also be performed with the non-bank public. This transaction does increase the quantity of inside money, but also reduces the quantity of privately held bonds outstanding. Therefore, it doesn’t change the quantity of net financial assets held by the private sector. read more