Bonds Are Going Haywire Again — Howard Marks Explains Why

SUMMARY

Howard Marks, co-founder of Oaktree Capital Management, discusses the structural factors driving recent volatility in the U.S. bond market and the implications of persistent fiscal deficits. Daniel Baer, former U.S. ambassador, provides insights on U.S.-Iran relations amid heightened geopolitical tensions, while Ed Elson critiques the delayed IPO of AI data center provider SB Energy.

MAIN POINTS

• U.S. Treasury yields surge to multi-decade highs despite government buyback efforts, signaling deep investor concerns. [1:30]
• Howard Marks identifies persistent inflation, ballooning deficits, and strong capital demand as key drivers of rising yields. [6:00]
• Marks argues that current interest rates are historically low and that expectations for imminent rate cuts are likely misplaced. [12:00]
• Discussion centers on the psychological tipping point around the U.S. national debt surpassing $40 trillion and its impact on market sentiment. [18:00]
• Daniel Baer analyzes the complex U.S.-Iran diplomatic landscape and the global economic fallout from the ongoing conflict. [22:00]
• Baer highlights the dual crises of energy and food insecurity stemming from the Iran war and Black Sea disruptions. [26:00]
• Ed Elson critiques SB Energy's delayed IPO, questioning the company's business fundamentals and market valuation. [29:00]

DETAILED ANALYSIS

Recent turmoil in the U.S. bond market has brought yields on key Treasury securities to levels not seen in nearly two decades, with the 10-year yield climbing above 5.1% and the 30-year yield nearing 5.4%. Despite the Treasury Department's historic buyback operations, which saw $6 billion in long-dated bonds purchased in an attempt to stabilize rates, yields continued to rise. Howard Marks, a veteran investor and co-founder of Oaktree Capital Management, attributes this persistent upward pressure to a confluence of structural factors rather than short-term policy missteps.

Marks identifies three primary forces driving the bond market's current trajectory. First, inflation remains stubbornly above the Federal Reserve's 2% target, even after retreating from pandemic-era highs. Investors, wary of lending money long-term in an environment where future dollars may lose purchasing power, demand higher yields as compensation.

Second, the U.S. government's fiscal position has deteriorated, with annual deficits approaching $2 trillion and total national debt surpassing $40 trillion. Marks likens this to a household perpetually spending beyond its means, warning that the scale and persistence of these deficits are unprecedented outside of crisis periods. Third, there is intense competition for capital, as both the government and private sectors—particularly in areas like artificial intelligence—seek to finance ambitious growth, further driving up borrowing costs.

A notable shift has occurred in investor psychology, according to Marks. While the U.S. has run deficits for decades, the sheer magnitude of recent shortfalls and the apparent lack of political will to address them have heightened global concerns. The symbolic crossing of the $40 trillion debt threshold appears to have crystallized anxieties, prompting more pointed questions about America's fiscal sustainability.

Marks notes that while Japan has managed high debt levels without immediate market fallout, the U.S. situation is unique due to its central role in global finance and the dollar's reserve currency status.

Despite the prevailing narrative that current interest rates are high, Marks contends that, in historical context, they remain relatively low. He points out that the near-zero rates of the past decade were an anomaly, not the norm. The Federal Reserve's benchmark rate hovered at zero from 2009 to 2021, creating unrealistic expectations for perpetually cheap borrowing.

Marks cautions that investors should not count on a rapid return to such conditions, predicting that rates are unlikely to decline significantly in the next one to two years. This has important implications for equity markets, as higher rates generally weigh on stock valuations, though Marks distinguishes between macroeconomic risks and the underlying health of U.S. companies.

On the question of how to respond to fiscal and monetary uncertainty, Marks advises caution but not panic. While reducing exposure to dollar-denominated assets might seem prudent if the currency faces debasement, he argues that the U.S. remains the most robust developed economy, making wholesale shifts to foreign assets risky. The timing of any potential reckoning for U.S. fiscal excesses is, in his view, unknowable—a sentiment echoed by Warren Buffett and others.

Marks emphasizes the role of human psychology and cognitive dissonance in delaying market reactions until a critical mass of concern is reached, as seen with the recent focus on the $40 trillion debt figure.

Transitioning to geopolitics, Daniel Baer, former U.S. ambassador and interim president of the Carnegie Endowment for International Peace, discusses the fraught relationship between the U.S. and Iran. Recent speeches at the United Nations General Assembly by President Trump and Iran's President Peskian underscored the adversarial tone, yet diplomatic contacts continue behind the scenes. Baer notes the unpredictability of negotiations, with both sides acutely aware of the political stakes tied to the upcoming U.S. midterm elections.

He suggests that while a breakthrough before the elections is possible, the timeline and terms remain highly uncertain, a view shared by major financial institutions like JP Morgan.

Baer also highlights the broader humanitarian and economic consequences of ongoing conflicts. The closure of the Strait of Hormuz and disruptions in Black Sea grain exports threaten to drive up global energy and food prices, disproportionately affecting vulnerable populations. He calls for renewed diplomatic efforts to secure ceasefires and restore trade flows, warning of a "double whammy" that could leave millions facing higher costs or outright shortages.

Finally, Ed Elson turns to the private sector, scrutinizing the delayed IPO of SB Energy, an AI data center provider. Despite a planned $50 billion valuation, the company has yet to complete a single operational data center, with most projects still in the pre-construction phase. Elson questions the credibility of SB Energy's projected $400 billion revenue backlog, noting that the vast majority of this revenue is not expected to materialize for many years, while the firm's core solar business is shrinking.

The market's skepticism, reflected in the IPO's postponement, underscores the heightened scrutiny facing high-growth tech ventures amid a more challenging funding environment.

LINKS

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