Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the ra

Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the rate. The Treasury department sells bonds to raise cash to pay government expenses, both for short term (until the next chunk of quarterly taxes come in) and the long term (spending in excess of government receipts). A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%. The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries. Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.