Most Sensitive Moment for US Treasuries: $16 Billion Long-Bond Auction + Fed Minutes to Test Markets Early Tomorrow

Global bond markets are experiencing the most intense wave of selling in decades, while the US market is about to face two major stress tests on the same day.

In the early hours of August 20 (Beijing time), the US Treasury will sell $16 billion in 20-year Treasury bonds, and the Federal Reserve’s July minutes will be released simultaneously at 2:00 AM. These two events exert pressure on different parts of the yield curve—the former affects long-end interest rates, while the latter influences short-end expectations.

The scenario most feared by the market is that a weak auction and hawkish minutes will coincide on the same day, creating a mutually reinforcing effect that pushes the entire yield curve higher, thereby spreading turmoil to tech stocks, emerging markets, and highly leveraged trades.

Prior to this, global long-end interest rates have approached highs not seen in years or even decades. The yield on the US 30-year Treasury bond touched 5.327% intraday on Tuesday, the highest level since June 2007; the 10-year yield rose to 4.747%, marking a new high since January 2025. Meanwhile, US stocks have fallen for three consecutive trading days, with the S&P 500 Index, Nasdaq Composite Index, and Dow Jones Industrial Average all under pressure.

First Test: Who Is Still Willing to Lend to the US for 20 Years

This 20-year Treasury bond 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 represents the highest borrowing cost for this maturity since its issuance was restarted six years ago.

The significance of this auction goes far beyond routine financing operations. The US fiscal deficit has approached $1.8 trillion so far this fiscal year, and the total size of US national debt is poised to exceed $40 trillion for the first time. Last week, the winning yield on the 30-year Treasury auction reached 5.216%, the highest in approximately 25 years. The Congressional Budget Office also raised its forecast for the fiscal 2026 budget deficit to $2.1 trillion last week, $200 billion higher than its February projection.

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 supply-demand dynamics for long-term debt, placing greater upward pressure on long-end yields.

According to Yulia Alekseeva, Head of Fixed Income at MissionSquare, concerns over fiscal deficits are the "primary and most persistent driver" of the recent sell-off in long-term Treasuries. She also pointed out that the large volume of long-duration corporate bonds issued by "hyperscalers" for data center construction is exacerbating supply pressure. Data from Goldman Sachs’ trading desk shows that AI-related bond issuance has reached $489 billion. The magnitude of bond supply pressure led Rich Privorotsky, Head of European Cash Trading at Goldman Sachs, to warn:

"To some extent, the Federal Reserve may even be forced to raise interest rates amid weakening data to flatten the yield curve and re-anchor long-end interest rates."

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

The market impact of the Federal Reserve’s July minutes this time far exceeds previous instances.

Since Chairman Walsh took office, he has significantly reduced forward guidance, using shorter wording in policy statements and rarely providing directional interpretation for the market during press conferences. Michael Gregory, Deputy Chief Economist at BMO Capital Markets, noted in a client report that the importance of the minutes has risen significantly in the new landscape of "concise policy statements, vague press conferences, and reduced forward guidance." Will Compernolle, Macro Strategist at FHN Financial, also stated that the minutes "may now reveal internal discussions not disclosed in Walsh’s ambiguous press conference last month."

The July meeting left a clear suspense: The Federal Reserve kept interest rates unchanged at 3.5% to 3.75%, but 3 out of the 12 voting members directly supported a rate hike. Mizuho US Economist Alex Pelle expects these 3 votes to be just the "tip of the iceberg," with the minutes showing that the group supporting rate hikes among the 19 senior officials is broader than externally perceived. "With each Federal Reserve meeting since the beginning of the year, there have been more hawkish officials," Pelle said.

The June minutes already presented two paths: If inflationary pressures ease quickly, most officials tend to keep rates unchanged and eventually loosen policy; if AI-related spending, Middle East conflicts, and tariffs continue to push up inflation, most officials believe further rate hikes may be necessary. Kurt Lewis, Head of Central Bank Policy at Piper Sandler and a former Federal Reserve official, pointed out that this means more than half of the committee members have taken both scenarios into consideration, 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 recently softer inflation data. However, if the minutes show that hawkish forces are stronger than market expectations, the recently cooled expectations for rate hikes could reignite.

Tech Stocks Under Pressure: Chain Reaction from an Upward Shift in the Yield Curve

Jonathan Krinsky, Chief Technical Strategist at BTIG, warned in a report: "We believe the stock market is not prepared for a rapid rise in long-end yields—for example, if the 30-year yield moves toward 6%." He pointed out that since the beginning of August, the 30-year Treasury yield has broken out of its three-year trading range, with technical signals indicating that this round of selling is not yet over.

John Velis, FX and Macro Strategist for the Americas at BNY, stated that behind the surge in long-end interest rates are factors including the long-term direction of monetary policy and a surge in capital demand driven by technology and AI capital expenditure. "This is not directly crowding out Treasury investment, but it is comprehensively pushing up the cost of capital," he said.

Looking at historical precedents, according to statistics from the X account Oddstats, the only time in history that 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 correction territory; nine months later, the index recorded its 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 occur on the same day, the logical consequences are clear: Short-end rates will come under pressure due to rising rate hike expectations, long-end rates will continue to rise due to insufficient demand for long-term debt, and the entire yield curve will be repriced. High-valuation tech stocks will bear the brunt—higher long-end rates increase the discount rate while suppressing the theoretical valuation of stocks, and rising short-end rates mean a simultaneous increase in corporate financing costs.

This Is Not Just a US Story

This bond market storm has spread to major developed economies. The yield on German 30-year government bonds rose to a 15-year high of 3.763%, French bonds of the same maturity touched their peak since 2008, and Japan’s 30-year government bond yield rose to 4.1285%, surpassing the 30-year high set this spring. According to data compiled by Bloomberg, the average yield of the benchmark portfolio for investment-grade sovereign bonds has surged to approximately 4.5%, the highest level since records began in 2015.

Luis Alvarado, Co-Head of Global Fixed Income at Wells Fargo Investment Institute, stated, "Almost all major fixed-income markets are showing the same trend; the deficit problem is global, not a story unique to the US." However, he emphasized that the size of the US Treasury market far exceeds the sum of the government bond markets of Japan, the UK, the EU, and other Asian countries, meaning US issues have a stronger transmission effect.

Charles Luke, Chief Investment Officer at City National Bank and RBC Rochdale, pointed out that as global interest rates climb, some capital is flowing back to other markets, "which naturally puts some pressure on overseas buyers of Treasuries." He bluntly stated: "I think the Treasury is indeed somewhat nervous at this moment."

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