Howard Marks: U.S. Fiscal Discipline Out of Control, Buying Bonds to Suppress Yields is Just "Putting Ice Packs on a Feverish Patient"

Written by Xu Chao, Wallstreetcn

As U.S. long-term bond yields remain persistently high, Oaktree Capital co-founder Howard Marks has issued a warning: runaway U.S. fiscal policy is the root cause of rising interest rates, and any market intervention that sidesteps this issue is merely a short-term fix that treats the symptoms rather than the underlying disease.

This Tuesday, Marks released his latest memorandum on Oaktree Capital’s official website, pointing directly to the deep-seated risks in U.S. fiscal policy. He criticized the Treasury’s move to expand its long-term debt buyback program, arguing that such actions can only suppress yields in the short term but cannot address the fundamental drivers pushing interest rates higher. “Forcibly buying bonds to suppress rates is like a doctor applying an ice pack to a feverish patient,” Marks wrote. “The ice pack may temporarily lower the temperature, but without addressing the underlying cause of illness, it is highly unlikely the patient will truly recover.”

In Marks’s view, the true “root causes” include stubborn inflationary pressures, continuously expanding government debt, and massive capital demands exemplified by artificial intelligence infrastructure construction. He emphasized that the current U.S. fiscal deficit accounts for approximately 6% of GDP, “an exceptionally high level for an economy enjoying prosperity with unemployment at just 4%.” Importantly, he also noted that in the current climate, dumping U.S. stocks and dollar-denominated assets is not the solution, as shifting to non-U.S. assets carries equally significant risks.

Treasury’s “Operation Twist” Fails to Convince the Market

Previously, the U.S. Treasury announced it would expand the scale of its long-term debt buybacks to at least $4 billion per operation, following signals from Treasury Secretary Bessent of being willing to “do whatever it takes.” While long-term yields dipped on the day of the announcement, they rebounded the very next day.

Marks likened such market interventions to supporting a ball with a jet of water in the ocean: when the jet is flowing, the ball remains afloat, but the moment the pump stops, the ball drops.

He cited remarks by investor Stan Druckenmiller published in The Wall Street Journal to support this view: “Every basis point of artificially suppressed yield is a subsidy for delay… When governments try to defend prices against fundamentals, they are invariably the losers; the only variable is how much money they spend before they give up.”

Deficit, Inflation, and AI Capital Demand: Triple Pressures Drive Up Long-End Rates

In his memorandum, Marks systematically outlined the structural roots behind the upward trajectory of long-term rates.

First is the fiscal deficit. He pointed out that a deficit rate of around 6% of GDP is a rare high during an economic expansion. Net interest payments are projected to exceed $1 trillion this year, surpassing the defense budget, and this figure will accelerate as the debt stock continues to grow. He criticized the current administration for accumulating massive debt during boom years, which completely departs from the original Keynesian logic of “running deficits during downturns and paying them down during recoveries.”

Second is inflationary stickiness. Marks noted in the memorandum that PCE inflation remains above the Federal Reserve’s 2% long-term target, forcing the Fed to maintain a relatively tight stance; large-scale deficits inherently carry inflationary effects because the liquidity injected through government spending exceeds what is withdrawn via taxation, further driving up aggregate demand.

Third is the wave of AI-driven capital demand. Citing McKinsey forecast data, Marks stated that over $5 trillion will be invested globally in AI-related data center construction by 2030. This capital demand compounds with the Treasury’s net new bond supply of approximately $2 trillion annually, jointly pushing up funding costs. “Increased demand leads to higher prices, which is the simplest law of economics,” he wrote. “It is entirely understandable that rising capital demand exerts upward pressure on interest rates.”

The Real Solution: Fiscal Discipline, Not Market Manipulation

Marks made it clear that suppressing interest rates should not be the policy objective itself; addressing the fundamental factors driving them higher is what matters. He listed what he considers the only viable long-term solution: enhance fiscal responsibility by increasing the revenue-to-GDP ratio through higher income tax rates (particularly for high earners) and eliminating tax breaks, while capping expenditure growth below GDP growth.

He also noted that boosting the GDP growth rate can help improve the deficit situation, where the widespread application of AI as a productivity tool and business-friendly policies are indispensable—provided that new tax revenues are no longer squandered.

Marks concluded with Warren Buffett’s remarks at the 2025 Berkshire Hathaway annual meeting: “What worries me is America’s fiscal policy… The fiscal deficits we are running currently are unsustainable over a sufficiently long time horizon.”

Diversification Has Value, But Do Not Overcorrect

Regarding asset allocation, the most pressing concern for investors, Marks’ stance is relatively measured.

He candidly admitted that this is fundamentally a political issue, yet it poses a practical challenge for investors. Dumping U.S. stocks does not solve the problem—if funds are moved into dollar-denominated bank deposits, money market funds, or bonds, the risk remains unmitigated. To hedge against dollar depreciation, investors must shift to assets denominated in other currencies, non-financial assets (such as gold or foreign real estate), or shares of non-U.S. companies.

However, Marks warned that this path is far from smooth. Many companies in other developed markets have weaker growth prospects than leading U.S. firms and face heavier regulatory burdens. While emerging markets hold growth potential, the likelihood of realizing it comes with greater uncertainty. He believes the comprehensive advantages of the United States in its free-market system, innovation vitality, rule of law, higher education, and depth of capital markets remain formidable, noting that “no other country possesses these traits to the same degree.”

Marks did not entirely rule out moderate diversification away from dollar assets, but emphasized that timing a large-scale shift is exceedingly difficult. “No one knows when the problem will truly explode, and until then, such a maneuver is likely to look like a mistake for a considerable period.”