Bernanke confirms QE2; the bond market goes up.
It is really very simple. The government is selling bonds to the government. The government can charge unreasonably high prices for its bonds because it knows the government will buy its bonds anyway. The government will not object to paying up for the bonds issued by the government, because it knows it will have an unlimited supply of funds. These funds will be raised by selling more bonds to the government. You may ask, why would the government manage the deficit by selling bonds to the government? Because by selling bonds to the government, it can take advantage of the super-low interest rates set by the government. The government's job is to keep interest rates super-low. It is keeping them super-low by purchasing bonds issued by the government. Why would the government want to keep interest rates low? Because by keeping them low, it can refinance its debt to the government. Why would it want to do that? Because by refinancing its debt to the government, it can maintain its creditworthiness so that it could sell even more bonds to the government.
The longer this economic masturbation continues, the more reason we have to choose real assets over bonds.