So as far as I can tell there are 2 types of losses: losses on paper (the market price of the bond I own fell but I have not sold yet) and cash losses (the gov

So as far as I can tell there are 2 types of losses: losses on paper (the market price of the bond I own fell but I have not sold yet) and cash losses (the government defaulted and didn't pay). Losses on paper are irrelevant because they don't effect the position of the bank or the amount of cash in circulation. The same applies for gains on paper. The bank just holds the bond until it expires at parity. Defaults or selling the bond for less than the real value is much more serious. This is because it leaves money in circulation. So if the central bank prints 100USD/Euro etc, holds the bond and then get's it's 100 back and burns it, then no currency has been created over all (just for a while between printing and burning). So there is no inflationary effect etc. If the price of the bond goes up or down, that's irrelevant as long as the bank never sells and just collects the 100 back. But if the bank prints 100 and buys a bond. Then sells it for 70. Then it can only burn the 70 it has, and then other 30 remains in circulation and there is a lasting increase is the money supply. Similarly if they sold the bond for 130 and burnt that, they would be actively reducing the supply to less than it was before (deflation) I don't think any central bank is SELLING bonds (other than at face value) right? So there is no issue here. Also, as the bonds come closer to their maturity date, their price will tend towards the face value. So this "issue" will disappear on paper too...