FWIW, having just updated Catalina (MacOS X 10.15.7) to the latest security update along with Safari 14.0.2, I tried to replicate your issue without success.....my nested sub-category bookmarks behave correctly and as previously expected.
Do you have any third party modifiers installed which might impact Safari? I'm running stock and clean without any extension managers / modifiers and without any cookie controls other than those built into the browser.
