The most sensitive moment for U.S. Treasuries: $16 billion long-term bond auction + Federal Reserve minutes, testing the market early tomorrow morning

Author: Zhang Yaqi

The global bond market is experiencing the most intense wave of selling in decades, and the U.S. market is about to face two major stress tests on the same day.

In the early morning of August 20, Beijing time, the U.S. Treasury will auction $16 billion in 20-year bonds, and the minutes from the Federal Reserve's July meeting will be released at 2 AM. These two events exert pressure on different parts of the yield curve— the former relates to long-term rates, while the latter affects short-term expectations.

The market's biggest concern is that a weak auction and hawkish minutes could land on the same day, creating a mutually reinforcing effect that pushes the entire yield curve upward, thereby spreading to tech stocks, emerging markets, and highly leveraged trades.

Prior to this, global long-term rates have approached multi-year and even multi-decade highs. The yield on the U.S. 30-year Treasury bond touched 5.327% during trading on Tuesday, the highest since June 2007; the 10-year yield rose to 4.747%, a new high since January 2025. Meanwhile, U.S. stocks have fallen for three consecutive trading days, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all under pressure.

First Test: Who Still Wants to Lend Money to the U.S. for 20 Years

This 20-year bond auction will be priced at an approximate yield of 5.28%—this is the secondary market rate for existing 20-year bonds on Tuesday, and also the highest borrowing cost for this maturity since it was reintroduced six years ago.

The significance of this auction has long exceeded the scope of routine financing operations. The U.S. fiscal deficit has approached $1.8 trillion this fiscal year, and the total scale of U.S. debt is about to surpass $40 trillion for the first time. The yield on last week's 30-year bond auction reached 5.216%, the highest in about 25 years. The Congressional Budget Office also raised its budget deficit forecast for fiscal year 2026 to $2.1 trillion, $200 billion higher than the prediction made in February.

What the market really needs to test is whether buyers will return to the table at such high yield levels. If the final winning yield is significantly higher than pre-auction levels and bidding demand is weak, it would indicate a further deterioration in the long-term debt supply-demand relationship, leading to greater upward pressure on long-term yields.

According to Yulia Alekseeva, head of fixed income at MissionSquare, concerns over the fiscal deficit are the "primary and most persistent driving force" behind the recent sell-off in long-term bonds. She also pointed out that the large amounts of long-duration corporate bonds issued by "hyperscalers" for data center construction are exacerbating supply pressures. Data from Goldman Sachs trading desks show that the scale of AI-related bond issuance has reached $489 billion, and the significant supply pressure has led Rich Privorotsky, head of Goldman Sachs' European spot trading, to warn: "To some extent, the Federal Reserve may even be forced to raise interest rates in the face of weakening data to flatten the yield curve and re-anchor long-term rates."

Second Test: Can the Walsh Minutes Unravel the Policy Puzzle?

The market weight of the Federal Reserve's July meeting minutes is far greater than before.

Since taking office, Fed Chair Walsh has significantly reduced forward guidance, making policy statements shorter and providing less directional interpretation during press conferences. Michael Gregory, deputy chief economist at BMO Capital Markets, noted in a client report that the minutes' importance has significantly increased under the new pattern of "brief policy statements, vague press conferences, and reduced forward guidance." FHN Financial macro strategist Will Compernolle also stated that the minutes "may now reveal internal discussions that were not disclosed during Walsh's ambiguous press conference last month."

The July meeting left a clear suspense: the Federal Reserve kept rates unchanged at 3.5% to 3.75%, but three of the 12 voting members directly supported a rate hike. Mizuho U.S. economist Alex Pelle expects that these three votes are just the "tip of the iceberg," and the minutes will show that the group supporting a rate hike among the 19 senior officials is broader than the public perception. "Since the beginning of the year, more hawkish officials have appeared at every Fed meeting," Pelle stated.

The June minutes presented two paths: if inflationary pressures ease quickly, most officials prefer to keep rates unchanged and eventually ease policy; if AI-related spending, Middle Eastern conflicts, and tariffs continue to push inflation higher, most officials believe further rate hikes may be necessary. Piper Sandler's head of central bank policy and former Fed official Kurt Lewis pointed out that this means that more than half of the committee members have considered both scenarios, which is "significant."

Currently, the Atlanta Fed's market probability tracking tool shows that the probability of a rate hike in September has dropped from 82% after the July meeting to 59%, with recent soft inflation data being the main reason. However, if the minutes indicate that hawkish forces are stronger than the market expects, the recently cooled rate hike expectations may reignite.

Tech Stocks Under Pressure: The Chain Reaction of an Overall Upward Shift in the Yield Curve

BTIG chief technical strategist Jonathan Krinsky warned in a report: "We believe the stock market is not prepared for a rapid rise in long-term rates—such as the 30-year yield approaching 6%." He pointed out that since early August, the 30-year Treasury yield has broken through a three-year trading range, and technical signals indicate that this round of selling is not yet over.

John Velis, a forex and macro strategist at BNY Americas, stated that the surge in long-term rates is driven by both the long-term direction of monetary policy and the surge in capital demand brought about by technology and AI capital expenditures. "This does not directly crowd out Treasury investments, but it is broadly pushing up capital costs," he said.

Historically, according to statistics from X account Oddstats, the only time the 30-year Treasury yield rose from the 4% range to the 6% range within six months occurred in June 1999. Less than four months later, the S&P 500 index fell into a correction range; nine months later, the index recorded the last historical high before the bursting of the internet bubble. Notably, the 30-year yield was still below 4.6% in March of this year.

If hawkish minutes and a weak auction land on the same day, the logical consequence is clear: short-term rates will be pressured by rising rate hike expectations, while long-term rates will continue to rise due to insufficient demand for long bonds, leading to a repricing of the entire yield curve. Overvalued tech stocks will be the first to bear the brunt—higher long-term rates raise discount rates while simultaneously lowering theoretical stock valuations, and rising short-term rates mean that corporate financing costs will also climb.

This Is Not Just an American Story

This round of bond market turmoil has spread to major developed economies. The yield on Germany's 30-year bonds has risen to a 15-year high of 3.763%, the yield on French bonds of the same maturity has reached a peak not seen since 2008, and Japan's 30-year bond yield has risen to 4.1285%, surpassing the 30-year high set earlier this spring. According to Bloomberg compiled data, the average yield on investment-grade sovereign bond benchmarks has soared to about 4.5%, the highest recorded since 2015.

Luis Alvarado, co-head of global fixed income at Wells Fargo Investment Institute, stated, "Almost all major fixed income markets are experiencing the same trend; the deficit issue is global, not just a U.S. story." However, he also emphasized that the scale of the U.S. Treasury market far exceeds the combined total of Japan, the UK, the EU, and other Asian countries' bond markets, so the U.S. problem has a stronger transmission effect.

Charles Luke, chief investment officer at City National Bank and RBC Rochdale, pointed out that as global rates rise, some funds are flowing back to other markets, "which naturally puts some pressure on overseas buyers of Treasuries." He bluntly stated, "I think the Treasury is indeed a bit nervous at this moment."