This report from Sealand Securities Co., Ltd. (000750) addresses several critical questions currently on investors' minds: why are US Treasury yields surging, what is the probability of a September rate hike, which milestones matter for the midterm elections, are US stocks facing imminent risk, and what is the outlook for gold?

Since August 2026, long-term bond yields across major developed economies have trended higher, triggering volatility and corrections in both US equities and gold. This report aims to explain recent overseas market fluctuations by dissecting the reasons behind the yield rise, and offers an analysis of US stocks and gold by factoring in the forthcoming midterm elections and the Federal Reserve's monetary policy stance.

Why have US Treasury yields risen so sharply?

Tariff refunds have intensified fiscal pressure, and demand for Treasuries is weakening. Following the tariff ruling, the US began returning a portion of previously collected tariffs starting in May 2026, causing net tariff revenue to turn negative at one point and further expanding the monthly fiscal deficit. Simultaneously, Japan's reduction in its Treasury holdings has contributed to a softening in demand.

Intense capital expenditure by tech leaders has boosted their need for external financing, with corporate bond supply siphoning away funds. These capital expenditures are squeezing cash flows at major tech companies, broadening their debt financing needs, and creating competition between corporate bonds and Treasuries for investment capital.

Heightened US-Iran conflict has revived inflation expectations. With fresh military clashes and crude oil inventories continuing to decline, rising inflation expectations have pushed long-end yields upward.

Looking ahead, the trajectory of Treasury yields can be assessed through three distinct timeframes:

In the short term, watch the August CPI and PPI figures to see if they continue to cool off, which would reduce market expectations of a rate hike and ease upward pressure on yields. In the medium term, the core variable is whether crude oil prices will resume their upward trend, potentially reversing the current path of disinflation. Over the long term, it is critical to verify whether AI-related high-intensity capital spending can generate sufficient revenue growth and productivity gains, and whether US fiscal discipline can be restored to correct the medium-to-long-term supply-demand imbalance in Treasuries. Given that the long-term outlook remains uncertain amid ongoing policy and inflation expectation tussles, we expect yields to hold in a high-level range-bound pattern.

Is a September rate hike likely?

A September move remains uncertain. A single month of strong nonfarm payrolls is not sufficient to compel an immediate rate hike. Focus should remain on the August CPI and PPI data ahead of the Federal Open Market Committee meeting. While August nonfarm payrolls grew by 162,000, well above expectations, downward revisions to nonfarm data have widened since May, and with the August ADP figure coming in at a weak 38,000, a substantial downward data revision remains possible. On the inflation side, recent price firmness has largely been driven by energy costs, with core services and core goods not showing similar bumps. Potential inflation metrics, such as the trimmed mean PCE highlighted by Warsh, have shown a declining trend in recent months, giving the Fed ample room to wait and see.

Which milestones matter in the midterm election cycle?

Most state primaries have concluded, ushering in a period of intensive campaigning and early voting until the official election day on November 3. Vote tabulation will progressively confirm results, with the new session convening on January 3, 2027. The core issues in this midterm election revolve around economic performance and the cost of living. Persistent high inflation, coupled with a weakening labor market, is increasing electoral pressure on the Republican party. Current market pricing indicates that the probability of Republicans retaining control of the House has dropped to roughly 12%, while their odds of keeping the Senate stand at just around 52%. Uncertainty over control of both chambers has clearly risen.

US stocks: Short-term support with year-end denominator risks

US stocks have short-term support, but year-end pressure from the denominator side warrants attention. Under electoral pressure, the Trump administration is likely to have a stronger incentive to support market stability. While the VVIX/VIX ratio has risen, it has not yet approached historical extremes, suggesting the market has not moved into systemic risk-off mode. Fundamentals continue to underpin US equities, with second-quarter S&P 500 EPS growth reaching 31.8% year-over-year. We expect the market to maintain a firm tone with some fluctuations until the November election concludes. After the midterms, Treasury supply risks could resurface once more.

Gold: Near-term rate sensitivity, intact long-term story

In the short term, interest rates remain the dominant factor capping gold prices. The recent back-up in long-end yields has constrained gold. If the Middle East situation cools and market concerns over additional tightening diminish, gold prices could find room for a short-term recovery. However, with Fed policy direction still highly data-dependent and lacking clarity, interest rate volatility is likely to persist as a cap on gold's upside. For the remainder of the year, gold is more likely to trade in a range, with a breakout to fresh highs requiring stronger catalysts.

The structural support for gold remains robust. A changing of the guard at the Fed's helm and shifts in its policy framework are prompting markets to re-evaluate monetary policy independence. At the same time, rising US fiscal deficits and debt burdens are straining the dollar's creditworthiness, which should keep the structural uptrend in gold prices intact. Central banks' ongoing gold purchase trend, driven by reserve diversification and de-dollarization, continues to provide long-term support for gold allocations.

Risk warnings: The limitations of historical comparisons; certain data are updated infrequently and may not fully capture current developments; US monetary policy could tighten more than expected; inflation could rise significantly beyond projections; AI industry progress may disappoint; global macroeconomic uncertainty may escalate.