The government has regular monthly debt auctions to finance itself. Sometimes it's 3 month treasuries, other times it's 30 year treasuries, or anything in between. Depending on what the auction them off at, determines the interest rate of return.

If they auction off a $100 promise to pay a year later at $98, then the rate of return would effectively be about 2%. This would also have an effect on the value of all other similar treasuries. If you bought a treasury for $95 a few months ago, and now they are auctioning off at $98, then you will do well. If you bought a treasury at $98 a few months ago, and now they are auctioning off $95, then you have been killed.

However, even if the government doesn't have an auction, the treasuries market sets the value. If you bought a $100 treasury at $98, but then the market anticipates inflation, it may go down to $95 in value, because nobody will buy it now unless what they get back compensates for the higher inflation rates. Hence, the govt is desperate to manipulate the market and make it look like the inflation rate is low.

The important thing to understand though is that if the federal reserve sets the interest rate at say 1%, but treasuries are paying 2%, then you can bet your bottom dollar that people will find a way to borrow money at 1% and buy treasuries at 2%, and keep buying them till it drives up the price and reduces the return, because it's guaranteed profit secured by the state. So in that way, the federal reserve interest rate is intimately related to the treasury interest rate, and is intimately related to government financing. Hence the federal reserve is under an insane amount of pressure to keep their interest rate less than the bond market rate. In fact, I would venture every decision every made at the federal reserve is completely bond market driven.

This works pretty nicely till people lose faith that the dollar will hold value as a (reserve) currency, and decide for whatever reason to dump treasuries. Then all hell breaks loose, all the people who bought treasuries will see their market value go down, and the government will see the interest rate it auctions off at drastically go up.