Central bank post

If more and more investors are willing to buy riskier invest-
ments, for example moving even cautiously from a portfolio
stashed in the Treasury market to one filled with investmentgrade
corporate bonds, that new demand bids up the price for
those corporate bonds. Prices and yields move in opposite directions,
so when investors pay a higher price for these corporate
bonds they get a lower yield. As prices of riskier assets rise, the
return for that added risk decreases.
This willingness to take on added risk is one of the reasons
that longer-term interest rates remained unexpectedly low in
2004, 2005, and 2006, even as the Federal Reserve raised its
short-term interest rate target, the federal funds rate on
overnight loans. After the central bank had increased its target
by 4.25 percentage points, from 1 percent to 5.25 percent, the
yield on the Treasury’s 10-year note at the end of 2006 was virtually
at the 4.70 percent level of June 2004, when the Federal
Reserve began that round of interest rate increases. The yield
on the 10-year note did not get above 5 percent until April of
2006, the first time in four years, but stayed there for only four
months.