When the Fed replaces maturing Treasury securities with new issues, security prices will tend to rise and interest rates will tend to fall.

Question

Quizplus · Accepted Answer

When the Fed replaces maturing Treasury securities with new issues, it is essentially maintaining its level of demand for these securities. This action supports the prices of Treasury securities, as it prevents a decrease in demand that could occur if the securities were allowed to mature without replacement. Higher demand for securities leads to higher prices. Since bond prices and interest rates move inversely to each other, as prices rise, interest rates fall. This is because the fixed interest payments become more attractive relative to the higher price paid for the bond, effectively lowering the yield (interest rate) for new buyers.

When the Fed Replaces Maturing Treasury Securities with New Issues