Written by: Xu Chao, Wall Street See
As U.S. long-term bond yields continue to run at high levels, Oaktree Capital co-founder Howard Marks issued a warning: America's fiscal loss of control is the fundamental reason for rising interest rates, and any market intervention that bypasses this issue is merely a stopgap measure that treats the symptoms but not the root cause.
On Tuesday of this week, Marks published his latest memo on Oaktree Capital's official website, directly pointing to the deep-seated hidden dangers of U.S. fiscal policy. He criticized the Treasury Department's move to expand the scale of long-term bond buybacks, arguing that such actions can only push down yields in the short term but cannot address the fundamental drivers pushing interest rates higher. "Forcibly buying bonds to suppress interest rates is like a doctor applying an ice pack to a feverish patient," Marks wrote. "The ice pack may temporarily lower the temperature, but until the underlying cause is addressed, the patient is unlikely to truly recover."
In Marks's view, the true "causes" include stubborn inflationary pressure, continuously swelling government debt, and enormous capital demand represented by artificial intelligence infrastructure construction. He emphasized that the current U.S. fiscal deficit is about 6% of GDP, "an extremely abnormally high level for an economy that is enjoying a boom period with an unemployment rate of only 4%." Notably, he also pointed out that under the current circumstances, selling off U.S. stocks and dollar assets is not the way to respond, because shifting to non-U.S. assets also faces risks that cannot be ignored.
Treasury's "Operation Twist" Fails to Impress the Market
The U.S. Treasury Department previously announced that it would expand the scale of long-term bond buybacks to at least $4 billion per operation, and Treasury Secretary Bessent subsequently signaled "whatever it takes." After the news was announced, long-term yields fell that day, but rebounded the next day.
Marks compared such market intervention to using a water column to hold up a ball in the ocean: when the water column surges, the ball can hover above the water surface, but once the pump stops, the ball will fall.
He cited investor Druckenmiller's commentary published in The Wall Street Journal as supporting evidence—"Every basis point of artificial yield suppression is a subsidy for delay... The government defending prices against fundamentals has always been the loser; the only variable is how much money they spend before admitting defeat."
Deficits, Inflation, and AI Capital Demand: Threefold Pressure Pushes Up Long-End Rates
In the memo, Marks systematically laid out the structural roots of rising long-term interest rates.
The first is the fiscal deficit problem. He pointed out that the current deficit rate of about 6% of GDP is a rare high during an economic expansion. Net interest expenses this year are expected to exceed $1 trillion, surpassing the defense budget, and as the scale of debt continues to expand, this figure will climb at an accelerating pace. He criticized the current government for still borrowing heavily during a boom period, completely departing from the original Keynesian logic of "deficits during depression, repayment during recovery."
The 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 relatively tight stance; large-scale deficits themselves also have inflationary effects, because the liquidity injected by the government through spending exceeds the amount recovered through taxes, further boosting aggregate demand.
The third is the wave of capital demand driven by AI. Marks cited McKinsey forecast data stating that by 2030, more than $5 trillion globally will be invested in data center construction directly related to AI. These capital demands overlap with the Treasury's net new bond supply of about $2 trillion per year, jointly pushing up the cost of funds. "Increased demand leads to higher prices—this is the simplest rule of economics," he wrote. "The growth in capital demand exerts upward pressure on interest rates, which is entirely understandable."
The Real Way Out: Fiscal Discipline, Not Market Manipulation
Marks made clear that suppressing interest rates itself should not be the policy goal; addressing the fundamental factors driving rates higher is. He listed what he considers the only feasible long-term solution: increasing awareness of fiscal responsibility, raising the share of revenue in GDP by increasing income tax rates (especially for high-income groups) and cutting tax preferences, and keeping expenditure growth below GDP growth.
He also pointed out that raising 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 newly added tax revenue cannot continue to be squandered.
Marks concluded with Buffett's remarks at the 2025 Berkshire Hathaway annual meeting: "What worries me is U.S. fiscal policy... The fiscal deficit we are currently running is unsustainable over a very long time horizon."
Diversification Has Value, But Do Not Overcorrect
Regarding the asset allocation issue that investors care about most, Marks's position is relatively restrained.
He acknowledged that this is essentially a political issue, but it poses a real challenge for investors. Selling U.S. stocks does not solve the problem—if the funds are transferred to bank deposits, money market funds, or bonds also denominated in U.S. dollars, the risk is not eliminated; to avoid the risk of dollar depreciation, one would need to shift to assets denominated in other currencies, non-financial assets (such as gold or overseas real estate), or shares of non-U.S. companies.
However, Marks warned that this path is not smooth. Many companies in other developed countries have growth prospects inferior to leading U.S. companies and are subject to more regulatory constraints; although emerging markets have growth potential, the uncertainty of realizing it is higher. He believes that the United States's comprehensive advantages in its free-market system, innovative vitality, rule-of-law environment, higher education, and capital market depth remain prominent, "no other country possesses these traits to the same degree."
Marks did not completely oppose moderate diversification away from dollar assets, but stressed that timing a large-scale shift is extremely difficult. "No one knows when the problem will truly explode, and before that, such a move may very likely look like a mistake for a long time."
