Howard Marks: US fiscal discipline is out of control; buying bonds to suppress yields is just "applying an ice pack to a feverish patient."

As US long-term bond yields remain high, Howard Marks, co-founder of Oaktree Capital, warned that the root cause of rising interest rates is the out-of-control US fiscal situation, and any market intervention that bypasses this issue is merely a stopgap measure that does not address the underlying problem.

On Tuesday, Marks published a new memo on Oaktree Capital's website, directly addressing the deep-seated problems in US fiscal policy. He criticized the Treasury's move to expand long-term bond repurchase agreements, arguing that such actions can only lower yields in the short term but cannot address the fundamental drivers pushing interest rates up. "Forcibly buying bonds to lower interest rates is like a doctor putting an ice pack on a feverish patient," Marks wrote. "The ice pack may temporarily lower the temperature, but the patient is unlikely to truly recover until the underlying cause is addressed."

According to Marks, the real "causes" include persistent inflationary pressures, continuously expanding government debt, and the massive capital demands exemplified by the construction of artificial intelligence infrastructure. He emphasized that the current US fiscal deficit is about 6% of GDP, "an extremely unusually high level for an economy enjoying a period of prosperity with an unemployment rate of only 4%." It is noteworthy that he also pointed out that selling US stocks and dollar assets is not the solution in the current situation, as shifting to non-US assets also carries significant risks.

The Ministry of Finance's "Operation Twist" failed to sway the market.

The U.S. Treasury Department previously announced it would expand its long-term bond repurchase program to at least $4 billion per operation, and Treasury Secretary Bessant subsequently signaled a "do or die" approach. Long-term yields fell on the day the announcement was made, but rebounded the following day.

Max likened such market intervention to holding up a ball in the ocean with a water jet: the ball can remain suspended on the surface while the water jet is gushing out, but it will fall down once the pump stops.

He cited a commentary by investor Druckenmiller in the Wall Street Journal to support his point: "Every basis point of artificial yield suppression is a subsidy for procrastination... Governments defending prices against fundamentals are always losers; the only variable is how much they spend before they concede."

Deficits, inflation, and AI capital requirements are putting triple pressure on long-term interest rates.

In his memo, Marks systematically outlined the structural roots of rising long-term interest rates.

First, there's the issue of the fiscal deficit. He pointed out that the current GDP deficit rate of around 6% is unusually high for an economic expansion. Net interest payments this year are projected to exceed $1 trillion, surpassing the defense budget, and this figure will accelerate as the debt continues to expand. He criticized the current government for borrowing heavily during a period of prosperity, completely deviating from the original Keynesian logic of "deficits during recessions and debt repayment during recovery."

Secondly, there is inflation stickiness. In his memo, Marks mentioned that the PCE inflation rate is higher than the Fed's long-term target of 2%, forcing the Fed to maintain a tight stance; large deficits themselves also have an inflationary effect, because the liquidity injected by the government through spending exceeds the scale of tax revenue recovery, further pushing up aggregate demand.

Third is the surge in capital demand driven by AI. Marks cites McKinsey's forecasts, stating that by 2030, over $5 trillion will be invested globally in data center construction directly related to AI. This capital demand, coupled with the approximately $2 trillion in net new bond issuance annually by treasuries, will jointly push up funding costs. "Increased demand leads to higher prices—this is a simple economic law," he writes. "The upward pressure on interest rates from increased capital demand is entirely understandable."

The real solution: fiscal discipline, not market manipulation.

Marks made it clear that lowering interest rates should not be the policy objective; addressing the root causes driving interest rates up should be. He outlined what he considered the only viable long-term solution: increasing fiscal responsibility, raising the income-to-GDP ratio by increasing income tax rates (especially for high-income groups) and reducing tax breaks, and keeping spending growth below GDP growth.

He also pointed out that increasing the GDP growth rate would also help improve the deficit situation, in which the widespread application of AI as a productivity tool and the cooperation of pro-business policies are indispensable—but the premise is that the new tax revenue can no longer be squandered.

Marks concluded by quoting Buffett's remarks at the 2025 Berkshire Hathaway annual meeting: "What worries me is the fiscal policy of the United States... The fiscal deficit we are currently running is unsustainable in the long run."

Decentralization has its value, but we must not overdo it.

Regarding the asset allocation issue that investors are most concerned about, Marks' stance is relatively restrained.

He admitted that this is essentially a political issue, but it poses a real challenge to investors. Selling US stocks does not solve the problem—the risk is not eliminated if funds are transferred to bank deposits, money market funds, or bonds that are also denominated in US dollars; to hedge against the risk of dollar depreciation, one must turn to assets denominated in other currencies, non-financial assets (such as gold or overseas real estate), or stocks of non-US companies.

However, Max warns that the road is not smooth. Many companies in other developed countries have less promising growth prospects than leading U.S. companies and are subject to more regulatory constraints; while emerging markets possess growth potential, the realization of this potential is more uncertain. He believes that the United States still holds significant advantages in its free market system, innovation vitality, rule of law environment, higher education, and capital market depth, "no other country possesses these qualities to the same degree."

Marks did not completely oppose the moderate diversification of dollar assets, but emphasized that the timing of large-scale transfers is extremely difficult to judge. "No one knows when the problem will really explode, and before that, such an operation may look like a mistake for a long time."

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