> if a government wants to borrow money it issues bonds at a fixed interest rate

Government bond interest rates are not fixed. They are set at auction.

Government: Here's an IOU. It says "I pay you $100 in yearly installments over the next 20 years -- US government" and this crowd of bidders has assembled to buy it today.

Auctioneer: Do I hear $50? $70 from the man in the red shirt. Okay, I hear $75 from the woman from BigCapital Megafund. JP Morgan, with your hand in the air, $80. Last National Bank, $86. $86 from Last National, any other bids? Going once...Going twice...SOLD to Last National Bank."

Then Last National Bank pays the government $86 when the auction ends. According to the IOU, the government pays Last National Bank $5 a year for the next 20 years.

Except the auction process isn't a live auction, it's done by everyone sending their bids to a government computer system that can handle thousands of bidders. After the deadline for submitting bids, the computer calculates the auction results.