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

Only by rebuilding fiscal discipline can we find a true solution, while selling off dollar assets to invest elsewhere is equally fraught with danger.

Written by: Xu Chao, Wall Street Insights

As U.S. long-term bond yields continue to run at high levels, Howard Marks, co-founder of Oaktree Capital, has issued a warning: the loss of control over U.S. fiscal policy is the fundamental reason for rising interest rates, and any market intervention that avoids this issue is merely a stopgap measure that fails to address the root cause.

On Tuesday, Marks published a new memo on Oaktree Capital's website, directly pointing out the deep-seated risks in U.S. fiscal policy. He criticized the Treasury's move to expand the scale of long-term bond repurchases, arguing that such actions can only temporarily suppress yields without addressing the fundamental drivers pushing rates higher. "Forcing bond purchases to lower rates is like a doctor putting ice packs on a feverish patient," Marks wrote. "The ice packs may temporarily cool things down, but without addressing the underlying cause, the patient is unlikely to truly recover."

In Marks' view, the real "causes" include persistent inflationary pressures, ever-expanding government debt, and the massive capital demand represented by AI infrastructure development. He emphasized that the current fiscal deficit in the U.S. is about 6% of GDP, which is an extraordinarily high level for an economy enjoying a prosperous period with an unemployment rate of only 4%. Notably, he also pointed out that in the current situation, selling off U.S. stocks and dollar assets is not a viable solution, as shifting to non-dollar assets also carries significant risks.

Treasury's 'Distorted Operations' Fail to Move the Market

The U.S. Treasury previously announced it would at least expand the scale of long-term bond repurchases to $4 billion per operation, with Treasury Secretary Yellen subsequently signaling a "do whatever it takes" approach. Following the announcement, long-term yields fell that day but rebounded the next.

Marks likened this type of market intervention to holding a ball afloat in the ocean with a column of water: when the water is gushing, the ball can float on the surface, but once the pump stops, the ball will fall.

He cited investor Druckenmiller's comments in The Wall Street Journal to support his point—"Every basis point of artificially suppressed yields is a subsidy for procrastination... The government defending prices against fundamentals has always been a loser; the only variable is how much they spend before admitting defeat."

Deficits, Inflation, and AI Capital Demand: Triple Pressure Raising Long-Term Rates

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

First is the issue of fiscal deficits. He pointed out that the current deficit rate of about 6% of GDP is rare during periods of economic expansion. This year's net interest payments are expected to exceed $1 trillion, surpassing the defense budget, and as the debt continues to expand, this figure will accelerate. He criticized the current government for accumulating massive debt during prosperous times, completely deviating from the original Keynesian logic of "deficits in downturns, repayment in recoveries."

Second is inflation stickiness. Marks mentioned in the memo that the PCE inflation rate is above the Federal Reserve's long-term target of 2%, forcing the Fed to maintain a tight stance; the large-scale deficit itself also has inflationary effects, as the liquidity injected by government spending exceeds tax revenue, further pushing up total demand.

Third is the AI-driven wave of capital demand. Marks cited McKinsey's forecast data, stating that by 2030, over $5 trillion will be invested globally in data center construction directly related to AI. This capital demand overlaps with the Treasury's annual net new bond supply of about $2 trillion, collectively pushing up funding costs. "Increased demand leads to rising prices; this is the simplest economic law," he wrote. "The growth in capital demand exerts upward pressure on interest rates, which is entirely understandable."

The Real Solution: Fiscal Discipline, Not Market Manipulation

Marks clearly stated that lowering interest rates should not be the policy goal; addressing the fundamental factors driving rates higher is what matters. He outlined what he believes is the only feasible long-term solution: enhancing fiscal responsibility by increasing the share of income in GDP through raising income tax rates (especially for high-income groups) and cutting tax breaks, while controlling spending growth to be below GDP growth.

He also pointed out that increasing GDP growth rates would help improve the deficit situation, with the widespread application of AI as a productivity tool and pro-business policies being essential—but the premise is that new tax revenues cannot be squandered.

Marks concluded with a statement from Buffett at the 2025 Berkshire Hathaway annual meeting: "What worries me is the fiscal policy in the U.S.... The fiscal deficit we are currently running is unsustainable over a long time horizon."

Diversification is Valuable, But Avoid Overcorrection

Regarding the asset allocation issue most concerning to investors, Marks' stance is relatively restrained.

He admitted that this is essentially a political issue but poses real challenges for investors. Selling U.S. stocks does not solve the problem—if funds are shifted to bank deposits, money market funds, or bonds also denominated in dollars, the risk is not eliminated; to avoid the risk of dollar depreciation, one would need to turn to assets denominated in other currencies, non-financial assets (such as gold or overseas real estate), or stocks of non-U.S. companies.

However, Marks warned that this path is not smooth. Many companies in other developed countries have growth prospects that are not as strong as leading U.S. firms and face more regulatory constraints; while emerging markets have growth potential, the uncertainty of realization is higher. He believes that the U.S. still stands out in terms of its comprehensive advantages in free market systems, innovation vitality, rule of law environment, higher education, and depth of capital markets, stating, "No other country possesses these traits to the same degree."

Marks does not completely oppose moderate diversification of dollar assets but emphasizes that timing a large-scale shift is extremely difficult, "No one knows when the problem will truly explode, and until then, such actions may very well appear to be a mistake for a long time."