Tonight, US Treasuries are set to face a major test.

According to the schedule, the U.S. Treasury will "borrow" another $16 billion from investors at 1 a.m. Beijing time on Thursday, with a 20-year term, to help fund the U.S. budget deficit of nearly $1.8 trillion so far this year. 

The response from investors will probably be: "No problem, but you have to pay a yield of nearly 5.28%" — which is the transaction rate of 20-year U.S. Treasury bond yield in the current secondary market, and it may also be the highest borrowing cost for Washington since the 20-year bond variety was issued six years ago...

As long-term U.S. Treasury yields continue to hover at their highest levels in decades, more and more market traders are focusing on that disturbing question — how high a price will it take to persuade global capital to continue lending money to the United States?

20-Year U.S. Treasury Auction Draws Wide Attention

Under normal circumstances, U.S. Treasury auctions are just mundane routine financial events that rarely cause major market fluctuations. However, persistently high fiscal deficit spending, policy uncertainty brought by Kevin Warsh, the new chairman of the Federal Reserve, and the surge in overall debt issuance have turned a single U.S. Treasury auction into a high-risk market event.

The 30-year U.S. Treasury auctioned by the U.S. Treasury last week had a winning yield as high as 5.216%, setting the highest issuance rate for similar debts in a quarter of a century, which also makes the risk of the $16 billion 20-year Treasury auctioned by the U.S. Treasury tonight equally unignorable. After 30-year and 10-year Treasury bonds were traded at multi-year highs one after another, this auction will become a critical moment to test whether investors can continue to take on long-term debts under the dual pressure of inflation and fiscal deficits.

A higher-than-expected winning yield on government bonds usually means weak market willingness to take over. Since bond prices move in the opposite direction to yields, buyers will only agree to lend money to the government if they force down prices, thus pushing up yields.

On Tuesday, the 30-year Treasury yield once surged to 5.327% during the session, hitting a new high since June 12, 2007; according to Dow Jones Market Data, the benchmark 10-year Treasury yield also once touched 4.747%, the highest intraday level since January 15, 2025. However, these yields fell back towards the end of the trading day.

At present, the sharp surge in long-term bond yields has even become a new hidden danger for the U.S. stock market bull market. As of Tuesday's close, the S&P 500 index fell 53.30 points, or 0.69%, to close at 7,691.76 points; the Nasdaq Composite Index fell 355.20 points, or 1.33%, to close at 26,289.71 points. Both posted their largest single-day declines since July 29.

"This (the upward movement of long-term bond yields) is either related to the long-term outlook for monetary policy, or related to the increased capital expenditure investment demand in the technology and AI sectors," said John Velis, Americas FX and Macro Strategist at BNY Mellon, "We don't want to say that AI credit is crowding out investment in government bonds, but it is indeed pushing up capital costs across the board."

Yulia Alekseeva, head of fixed income at MissionSquare, said that in order of importance, concerns about fiscal deficits are the "dominant and most persistent driving force" behind the recent sell-off in long-term government bonds.

But she also pointed out that the massive issuance of long-term corporate bonds by ultra-large cloud service providers to fund their data center construction is exacerbating the problem. In addition, confusion about the Fed's future monetary policy has also hindered the stability of longer-term government bond debts.

Is the Long-Term Bond Sell-Off Not Over Yet?

Usually, investors often demand higher yields on long-term debts with maturities of 10, 20 and 30 years, because this exposes investors to decades of inflation risk and the possibility that the government will continue to issue unlimited amounts of debt. To compensate for the additional risks assumed over time, investors will demand higher premiums, thus pushing up yields.

At present, the total U.S. federal debt is expected to soon break through the $40 trillion mark for the first time. The Congressional Budget Office last week raised its forecast for the 2026 annual budget deficit to $2.1 trillion — $200 billion more than expected in February this year.

Outside the United States, deficits and higher energy prices triggered by the U.S.-Iran conflict are also factors pushing up global yields in most advanced economies. The yield on Germany's benchmark 30-year government bond is currently at a 15-year high of 3.763%, while the yield on similar French government bonds has reached the highest level since 2008. Japan's 30-year government bond yield rose to 4.1285%, refreshing the 30-year high set this spring.

Luis Alvarado, co-head of global fixed income at Wells Fargo Investment Institute, said: "The major fixed income markets do generally show the same trend." He added, "The problem in the United States is that its Treasury market is far larger than the sum of Japan, the United Kingdom, the European Union and other Asian countries. Fiscal deficits exist globally, so this is not a phenomenon unique to the United States."

However, some insiders believe that as global interest rates rise, this may make investments in the United States less attractive. "You will see some capital flowing back to those other economies, which will put some natural pressure on foreign buyers of U.S. Treasuries," said Charles Luke, Chief Investment Officer of City National Bank and RBC Rochdale.

"That's why I think the U.S. Treasury is a little nervous right now," he noted, adding that the soaring Treasury yields this summer have not yet peaked, nor have they reached a level to curb the bond sell-off.

This article is from the WeChat Official Account "CLS.cn", author: Xiaoxiang, published with authorization from 36Kr.