People spend their bank deposits on Government debt. This increases the money supply, because, being a Government promise, Treasuries are a form of money. The Treasuries are now held by the person investing and the bank deposits are spent into the economy by the Government. The bank deposits remain and new Treasuries are held by the (former) depositor at the (commercial) bank. Deposits have been swapped for Treasuries and the deposits remain.
The saver swaps deposits for Treasuries and the deposits are returned into the economy.
Imagine the Treasuries are used to pay a debt (owed by the Government) to the saver. In this case, since the Government returns the deposits to the saver, this amount is unchanged. All that changes is that the saver now also has Treasuries. The saver is, in effect, paid with new Treasuries.
What would be the point in holding cash after a bond market collapse?
The bank deposits are passed onto someone else and remain in the system, affecting prices. They have been pushed out by the Government debt.
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