Interest rates are affected by a mix of short- and long-term factors. Interest rates on bonds are tied to movements in price due to the mathematics of bond pricing. When a bond's price goes down, its interest rate, or yield, increases. When its price increases, its yield decreases. All publicly traded debt instruments experience interest rate movements throughout the trading day. These are usually very small changes, although they may be part of a larger trend in price movements, and are driven by supply and demand dynamics.
As a general rule, positive investor perceptions of the underlying quality of the bond issuer, whether corporate or sovereign, are associated with lower interest rates and higher prices. For example, if a country defaults on its debt by missing an interest rate payment, interest rates on all of its debt instruments increase. This is because demand for the country's bond instruments decreases due to increased perceived credit and default risk. Investors sell their bond holdings, driving the price down and rates up. Another way to look at it is that investors, recognizing the increased risks associated with the debt, need to earn higher interest rates to be enticed into investing in the same security.
The negative risks associated with a country's debt are also reflected in the debt of that country's corporate issuers. That's because the strength of the economy is such a strong driver of debt prices. Liquidity is also important. Investors factor liquidity risk into bond yields.
Longer-term, macroeconomic factors are a greater influence on interest rates. The government can intervene, using monetary policy to move rates up or down in an effort to control inflation or spur capital investment. In the long-run, however, the underlying fundamental risks drive yields. Inflation leads to increased interest rates because the associated decrease in currency values must be offset to induce lenders to lend. To some extent, investors take cues from credit rating agencies. Institutional funds typically have restrictions or investment focuses that can be heavily influenced by credit ratings. For example, there are huge bond funds that only invest in the highest rated corporate debt. If a company's credit rating is downgraded, this could result in the funds selling off their holdings, causing supply to increase substantially relative to demand, driving prices down and interest rates up.
Conversely, U.S. Treasury bills are considered the highest quality debt instruments available. When Standard and Poor's downgraded the U.S.'s long-term debt one notch, investors actually increased demand for medium-term Treasury bills, a phenomenon known as "flight to quality". Investors saw that the factors influencing the U.S.'s long-term ability to meet its debt obligations impact corporate and foreign issuers even more.