At a time of turbulence in the global bond market, the U.S. market will face two major tests on the same day: a $16 billion 20-year Treasury auction will test demand for long-dated bonds under a massive deficit, while the Fed's July hawkish meeting minutes will influence short-term rate hike expectations.

Written by: Zhang Yaqi, Wall Street Insight

The global bond market is experiencing one of the most intense sell-off waves in decades, and the U.S. market is about to face two major stress tests on the same day.

On August 20 at midnight Beijing time, the U.S. Treasury will sell $16 billion of 20-year Treasuries, and the Fed's July meeting minutes will be released at 2 AM. These two events weigh on different parts of the yield curve — the former relates to long-term rates, and the latter influences short-term expectations.

The market is most concerned about the scenario where a weak auction and hawkish minutes 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 high-leverage trading.

Prior to this, global long-term rates had approached multi-year, even multi-decade highs. The yield on the U.S. 30-year Treasury briefly reached 5.327% during trading on Tuesday, the highest since June 2007; while the 10-year yield rose to 4.747%, a new high since January 2025. At the same time, 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 is Willing to Lend Money to the U.S. for 20 Years?

This 20-year Treasury auction will be priced at a yield close to 5.28% — this is the secondary market rate for existing 20-year Treasuries on Tuesday and the highest borrowing cost since the reissue of this maturity six years ago.

The significance of this auction has already surpassed the conventional scope of financing operations. The U.S. fiscal deficit has approached $1.8 trillion this fiscal year, and the total amount of U.S. Treasuries is poised to exceed $40 trillion for the first time. The yield at last week's 30-year Treasury auction was as high as 5.216%, the highest in about 25 years. The U.S. Congressional Budget Office also raised the budget deficit expectation for fiscal year 2026 to $2.1 trillion, $200 billion higher than the February forecast.

What the market truly 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 bid demand is weak, it would indicate a further deterioration in the long-term debt supply and demand relationship, resulting in greater upward pressure on long-term yields.

According to MissionSquare's fixed income head Yulia Alekseeva, concerns over the fiscal deficit are the "most significant and persistent drivers" of the recent long-term Treasury sell-off. She also pointed out that the massive amount of long-term corporate bonds issued by "hyperscale technology companies" for data center construction is exacerbating supply pressure. Data from Goldman Sachs trading desk shows that the issuance linked to AI has reached $489 billion, with the supply pressure of bonds prompting Goldman Sachs' European cash trading head Rich Privorotsky to issue a warning:

"To some extent, the Fed may even be forced to raise rates in the face of weakening data to flatten the yield curve and re-anchor long-term rates."

Second Test: Can the Wash Meeting Minutes Unlock the Policy Dilemma?

The market weight of the Fed's July meeting minutes far exceeds that of previous releases.

Since taking office, Fed Chair Wash has greatly reduced forward guidance, with policy statements being shorter and press conferences providing little directional interpretation for the market. BMO Capital Markets' Deputy Chief Economist Michael Gregory pointed out in a client report that the minutes have become significantly more important in the new context of "brief policy statements, ambiguous press conferences, and reduced forward guidance." FHN Financial's macro strategist Will Compernolle also stated that the minutes "may now reveal internal discussions not disclosed during Wash's vague press conference last month."

The July meeting left a clear suspense: the Fed maintained rates at 3.5% to 3.75%, but three out of twelve voting members directly favored a rate hike. Mizuho's U.S. economist Alex Pelle predicts 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 perceived. "Since the beginning of the year, every Fed meeting has seen more hawkish officials," Pelle remarked.

The June minutes presented two paths: if inflation pressures ease quickly, most officials prefer to keep rates unchanged and eventually ease policy; if AI-related spending, Middle East conflicts, and tariffs continue to push up inflation, most officials believe further rate hikes may be necessary. Piper Sandler's head of central bank policy, former Fed official Kurt Lewis, pointed out that this means more than half of the 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%, mainly due to recent softer inflation data. However, if the minutes indicate that hawkish forces are stronger than the market expects, the just-cooling rate hike expectations may reignite.

Tech Stocks Under Pressure: The Chain Reaction of a Rising Yield Curve

BTIG's Chief Technical Strategist Jonathan Krinsky warned in a report: "We believe that the stock market is not prepared for a rapid rise in long-term rates — such as the 30-year yield moving towards 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 sell-off has not yet ended.

BNY's Americas Forex and Macro Strategist John Velis stated that the surge in long-term rates is driven both by factors regarding the long-term direction of monetary policy and the surge in demand for funding driven by technology and AI capital expenditures. "This does not directly crowd out Treasury investments, but it is raising capital costs across the board," he said.

Looking at historical precedents, according to statistics from X account Oddstats, the only previous occasion when 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 dot-com bubble burst. Notably, the 30-year yield was below 4.6% as recently as March this year.

Should the hawkish minutes and 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 long-term bond demand, leading to a repricing of the entire yield curve. High-valuation tech stocks will be hit first — rising long-term rates increase the discount rate while lowering the theoretical valuation of stocks, and rising short-term rates mean that corporate financing costs will climb in tandem.

This is not just a U.S. 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%, while France's bonds of the same maturity have reached their peak since 2008, and Japan's 30-year bonds have risen to 4.1285%, surpassing the 30-year high set earlier this spring. According to Bloomberg data compilation, the average yield of investment-grade sovereign bond benchmarks has surged to about 4.5%, the highest on record since 2015.

Wells Fargo Investment Institute’s co-head of global fixed income Luis Alvarado stated, "Almost all major fixed income markets have shown the same trend; the deficit issue is global and not just a U.S. story." However, he emphasized that the U.S. Treasury market size far exceeds the total of the Japanese, British, EU, and other Asian bond markets, thus the challenges faced by the U.S. have a stronger transmission effect.

City National Bank and RBC Rochdale’s Chief Investment Officer Charles Luke pointed out that as global rates rise, some funds are flowing back to other markets, "which naturally puts certain pressure on overseas buyers of Treasuries." He candidly noted: "I think the Treasury is indeed a bit tense at this moment."

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