ELLEVEST INSIGHTS

Imagine these two scenarios ...

Scenario A: Long-term interest rates just hit their highest level since 2007. The national debt has crossed $40 trillion. A war in the middle east has pushed oil prices up and inflation is expected to increase. There’s uncertainty around Fed policy and the market expects rate hikes soon. And roughly 40% of the global stock market is concentrated in a single bet on artificial intelligence.

Scenario B: The economy is growing. Unemployment sits at 4.1%. The stock market continues rising, but earnings are growing much faster than stock prices. S&P 500 earnings are up roughly 50% while the forward P/E has actually fallen from about 23x to 20x. Oil flows through the Strait of Hormuz have recovered to two thirds of their pre-war levels. And Washington has made it abundantly clear it will intervene, aggressively, if interest rates climb too far.

One feels scary and alarming and the other, optimistic and bullish. It might surprise you to learn that both are true about August’s market environment. The main difference is that Scenario A is getting far more attention right now than Scenario B.

FWIW: This concept is borrowed from a widely known fantasy football analyst to show how easily statistics, what information you choose to share, and how you frame it can be used to tell whatever story you want. For example, when stats for “Player A” and “Player B” are shown without names, you're left to decide which one you’d rather have — and once you’ve convinced yourself, it’s ultimately revealed they’re actually the same player. 

Shrugging through August

In August, stocks mostly shrugged their way higher again, with the S&P 500 up about 12% and Nasdaq up about 16% year to date. Meanwhile, in the bond market 30-year Treasury yields touched 5.33% in August, its highest level in 19 years. And nowhere is that selective-stats game more obvious right now than in the bond market.

Why are interest rates rising?

There are three explanations that keep coming up. Let’s dive in.

The first is national debt. The government owes $40 trillion, deficits are widening every year, and investors absorbing an endless supply of new bonds are demanding higher yields.

The second is inflation. Prices are still rising 3.4% a year, oil is elevated because of the war, and the new Fed Chair has been vague about how fast he plans to get inflation back to 2%. Markets dislike vagueness.

The third is all of the capital needed by tech/AI companies. Tech companies are borrowing to fund AI and they are competing with the government for bond buyers. Tech giants like Amazon, Meta, and Alphabet have borrowed hundreds of billions this year to fund data centers, and one estimate suggests that the wave of corporate borrowing alone has added roughly 0.3% to the 10-year Treasury yield. The idea is simple. Every dollar that picks the corporate bond is a dollar of lost demand for Treasuries, and Treasury yields have to rise to compete. Economists call this “crowding out.”

What these stories leave out

Let’s start with what the bond market is actually pricing. A bond yield is made of up two components: the inflation investors expect, plus a “real” return above inflation. The surprising part is expected inflation hasn’t moved. In fact, inflation expectations this year have actually drifted slightly lower even as yields climbed. The entire rise in rates has come from the real side. Why does that matter? Because if this were a debt crisis or an inflation panic, inflation expectations would be rising. The market is pricing something else entirely.

That something else is the strength of the economy. Ed Yardeni made his case that he’s not pushing the panic button, because a 4% to 5% yield is a normal range for a healthy, growing economy. That was the normal before the 2008 crisis ushered in fifteen years of artificially cheap money and low interest rates. Rates are high partly because things are good and yields are normalizing. Vanguard made a similar argument, pointing to AI-driven spending as a source of economic growth. So the same AI spending can be used to make two completely different arguments: it’s adding debt that is competing with Treasury bonds and pushing Treasury yields higher, or it’s driving economic growth and pushing real yields higher.

And finally, policy makers have already shown you their cards. Back in April 2025, the tariff announcements sent bond yields spiking, the administration paused the tariffs within days, with the President openly admitting he was watching the bond market get “queasy.” Policymakers blinked once, and this month they blinked again. The Treasury doubled its buybacks of long-term bonds the day after the 30-year hit its high and yields fell immediately. Treasury Secretary Bessent has made three separate moves in as many weeks to signal he’ll lean against rising yields, including hinting he could tap the Treasury’s nearly $1 trillion checking account to buy even more. You can debate whether intervention is good long-term policy, but you can’t debate their willingness to intervene, especially with mid-terms around the corner.

Two sides of the same coin

So back to Scenario A and Scenario B. Neither scenario was wrong. Both were incomplete, and that’s the point. Every market story is built from the same information set but just with pieces carefully selected. So when one has you convinced, ask what’s missing. The other scenario is out there, written about the same market, and it’s usually just as true. My fantasy draft is this week, and someone in my league will absolutely defend their sleeper pick with a persuasive, selective stat line. It works on fantasy football managers every year. It doesn’t have to work on you.

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