What happens to treasury bond rates if the Fed buys a lot of them?

Answer 1

This (Federal Open Market Operation) is one kind of monetary policy adopted by Federal Reserve to increase the money supply in the economy. By purchasing the securities Federal Reserve make more money available to the public thereby increasing the liquidity in the market and hence consumer spending. Actually this method helps to boost the economy during economic downturns.

Answer 2

When the Fed starts buying T-bonds, effectively it pumps money into the system. Therefore the interest rate starts going down. As the interest rate is inversely related to the T-bond prices, their prices start going up, and their yields start going down. Also the due to demand for purchase, the price increases. The Fed does this when they want to reduce interest rate to stimulate the economy and at times of surplus.

The opposite happens when the Fed starts selling T-bonds and other bonds. When the Fed sells bonds in large amount in the market, their price starts going down and their yields start going up. As money supply is decreased, and yields increase the interest rate goes up. The Fed does this at times of budget deficit in order to raise fund to balance federal budget. The Fed never actually does this, however. The Fed only increases money supply, thereby increasing the prices of good and service citizens want to buy.