The only real way out is to rebuild fiscal discipline, while selling off dollar assets to invest elsewhere is equally fraught with danger.

Written by: Xu Chao, Wall Street Watch

As the yields on long-term U.S. bonds remain high, Howard Marks, co-founder of Oak Tree Capital, has issued a warning: the lack of control over U.S. finances is the fundamental reason for rising interest rates, and any market intervention that bypasses this issue is merely a stopgap measure that does not address the root cause.

This Tuesday, Marks released a new memorandum on Oak Tree Capital's official website, directly pointing out the deep-seated risks in U.S. fiscal policy. He criticized the Treasury's move to expand long-term bond repurchase operations, arguing that such actions can only temporarily lower yields but cannot resolve the fundamental drivers pushing interest rates upward. "Forcibly buying bonds to suppress yields is like a doctor applying ice packs to a feverish patient," Marks wrote, "the ice packs may temporarily lower the temperature, but without addressing the underlying cause, the patient is unlikely to truly get better."

In Marks' view, the real "causes" include stubborn inflationary pressures, the ongoing expansion of government debt, and the massive capital demand represented by infrastructure construction related to artificial intelligence. He emphasized that the current fiscal deficit in the U.S. accounts for 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 under the current circumstances, selling U.S. stocks and dollar assets is not a viable response, as shifting to non-dollar assets also carries significant risks.

Treasury's “Distortion Operations” Fail to Move the Market

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

Marks likened such market interventions to using a water column to hold up a ball in the ocean: when the water is thrust up, the ball may float on the surface, but once the pump stops, the ball will drop.

He cited investor Druckenmiller's comments published in The Wall Street Journal to support his view—"Every basis point of artificially suppressed yield is a subsidy for postponement... 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 Pressures Driving Up Long-Term Rates

In the memorandum, Marks systematically outlines the structural roots behind the rise of long-term interest rates.

Firstly, there is the issue of fiscal deficits. He noted that a current deficit rate of about 6% of GDP is a rare high during an economic expansion phase. This year's net interest expenses are expected to exceed $1 trillion, surpassing the defense budget, and as debt continues to expand, this figure will accelerate upwards. He criticized the current government's large-scale borrowing during prosperous times, completely diverging from the original Keynesian logic of "deficit during a depression, repayment during recovery."

Secondly, there is the stickiness of inflation. Marks mentioned in the memorandum that the PCE inflation rate is above the Federal Reserve's long-term target of 2%, forcing the Fed to maintain a tightening stance; large-scale deficits in themselves also have inflationary effects, as the liquidity injected by government spending exceeds tax revenue collection, further driving up total demand.

Thirdly, there is the wave of capital demand driven by AI. Marks cites McKinsey's forecast data, stating that by 2030, over $5 trillion will be invested in data center construction directly related to AI globally. This capital demand combines with the Treasury's annual net new bond supply of about $2 trillion to jointly drive up the cost of funds. "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 Way Out: Fiscal Discipline, Not Market Manipulation

Marks clearly stated that lowering interest rates should not be a policy objective; addressing the fundamental factors driving interest rates upwards is what matters. He outlined what he considers the only viable long-term solution: raising fiscal responsibility awareness, increasing the proportion of income in GDP by raising income tax rates (especially for high-income groups) and cutting tax incentives, while keeping expenditure growth rate below that of GDP.

He also pointed out that increasing GDP growth rates would help improve the deficit situation, where the widespread application of AI as a productivity tool and pro-business policies are both indispensable—provided that new tax revenue is not squandered further.

Marks concluded with a statement made by Buffett at the 2025 Berkshire Hathaway annual meeting: "What worries me is U.S. fiscal policy... The fiscal deficit we are currently running is unsustainable from a long-term perspective."

Diversification Is Valuable, But Don’t Overcorrect

Regarding the asset allocation question of greatest concern to investors, Marks takes a relatively restrained stance.

He admits that it is essentially a political issue, but poses a real challenge for investors. Selling off U.S. stocks does not solve the problem—if funds are moved to bank deposits, money market funds, or bonds similarly denominated in dollars, the risk has not been 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 stocks of non-U.S. companies.

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

Marks does not completely oppose moderate diversification of dollar assets but emphasizes that timing a massive shift is extremely difficult, "no one knows when the problem will truly explode, and until then, such operations may appear to be a mistake for a long period."