Prof G Markets - Bonds Are Going Haywire Again — Howard Marks Explains Why

Episode Date: September 24, 2026

Ed Elson is joined by Howard Marks to break down what’s happening with the bond market and how investors should act accordingly. Then, Daniel Baer joins to discuss the biggest takeaways from the UN General Assembly so far and where the relationship between the U.S. and Iran stands. Finally, Ed gives his take on an AI data center provider delaying its IPO. Howard Marks is the co-founder and co-chairman of Oaktree Capital Management. Daniel Baer is the former U.S. Ambassador to the Organization for Security and Cooperation in Europe and the Interim President of the Carnegie Endowment for International Peace. Subscribe to the Prof G Markets Youtube Channel  Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

SpaceX had a huge opening on the public stock exchange, but their story has changed a lot since opening day. Anthropic and Open AI are lining up to IPO next. What does that mean for them? And more importantly, what does that mean for you? What's an IPO anyway? And should you be investing in them? I'm Vivian 2, Your Rich BFF, and on this week's episode of Net Worth and Chill, we're getting into the weeds on IPOs, what they tell us, and what we should and should not be doing with them.

Listen wherever you get your podcasts or watch on YouTube.com slash your rich BFF. Money markets, Matt. If money is evil, then that building is hell. Welcome to Profite Markets. I'm Ed Elson. It is September 24th. Let's check in on yesterday's Market Vitals. The major indices declined as U.S. Treasuries sold off. More on that in a second. Brent crude spiked above $103 adding pressure to the sell-off, and on Calci, the odds of another rate hike next month rose to 66%, and the odds of a third hike later in the year rose to 34%. Okay, what's happening?

The bond market continues to flash bright red. Yesterday, the 10-year treasury yield ripped above 5.1% to a fresh 19-year high, the 30-year yield returned to levels not seen since 2004, and even the five-year yield breached 5% the highest since before the financial crisis. That was, despite the Treasury's attempt to bring yields down with a historic buyback program weeks ago. Treasury Secretary Scott Besant bought $6 billion worth of long-dated bonds, and still yields went up. And Bessent's second buyback operation, another $6 billion is set to happen today. Well, our guest today says that the rise in yields is no surprise. In his new memo, legendary investor Howard Marks argues that the Treasury's

response was a cosmetic fix to America's economic problems. He says that buybacks will not solve a situation that is structurally unsound. He joins us today on Profi Markets to explain why. Howard Marks, thank you so much for joining us. Looking at the yields, the 10-year, is back at its highest levels. In years, 30-year, close to 5.4% highest levels. In decades, the Treasury has tried multiple times to stop the bleeding here. It isn't working. What is going on?

What is the bond market telling us right now? We never know exactly what the market is saying. The market doesn't tell you what it's saying. It only does something, and you can infer from what's going on around you, what the causes might be. When rates go up, other than when government puts them up, what it basically means is that people want more yield from a given investment. Now, why might they want more yield?

The obvious reason is because if they think if they lend you $100 today, when you pay them back in 30 years, it'll buy less. and so they need a purchasing power protection or inflation premium in the yield to compensate for that. And that's the common. The other reason that yields go up is because they think that the proposition has become riskier. So if they lend you $100 today, the probability that they get $100 back in 30 years, it may be a little less. So some risk. Another reason that yields go up is because there's a lot of demand for capital.

And so a given use of capital has to compete with all the other uses to attract it. So, you know, yields on investment X go up to make sure that it goes to X rather than Y. So there are lots of different reasons. And, you know, as I said in the memo, I think the main reason, why rates are going up is because, number one, inflation is stubborn, and it has stubbornly been above the Fed's 2% target for, you know, for the last, well, five years. And, you know, while it has come down from 9.5, it went down to like 2.7, the target is 2. They could never get it to 2. And now with the impact of the Ukraine war raising oil prices, it's up to 3.

point four or something like that. So I think that's the main reason. People want inflation protection if they're going to lend you money for a long time. But there's also concern, you know, simultaneously, you know, the U.S. came out with a number of $40 trillion for its national debt. And there's concern about the impact, the meaning of that, I would say, profligacy. Why are we spending $2 trillion a year more than we're taking? taking in taxes. Why are we running a deficit that approaches two trillion dollars? You know,

if you had a brother-in-law who every year or every month spent more than his salary and put it on the credit card, you might look askance. Well, so that may be going on here. And then the third factor is that there's a very strong demand for capital at this time. And in addition to the U.S. financing the growth of the economy, which always takes place, it has to finance a deficit approaching $2 trillion. And that's at the same time that AI is drawing, you know, maybe hundreds of billions of dollars from investors in the debt market and competing with the Treasury to raise money. Just looking at the deficit as an example, which has been a problem for decades now, the US debt, as long as I've been a conscious human being, has been an issue.

It seems that something has changed this summer, really, at least in the bond markets, there has been a change in the tone of bond investors who seem to be a lot more worried about the US deficit today than they were before, despite the fact that it has not been in great shape for a long time. I assume it might be because we're getting more and more indication that our leadership doesn't care about this at all. And you talk about this in your memo that the US has this, quote, golden credit car. And there's basically no talk of balancing the budget anymore. How big of an issue is this? And what do you think is changing? Or what do you think has changed in the minds of bond investors, not just in the U.S., but I guess around the world, too.

Ed, for historical reference, I think the last time we had a budget surplus was when Clinton left office. So that was 2000. So 26 years of deficits. One thing that has changed is the size of the deficits as a percentage of GDP. And, you know, we ran a $2 trillion deficit, I think, around 21 to provide COVID relief, you know, then people kind of got used to that level. And they've continued it. And, you know, it's one thing to run a big deficit when you're in a recession and the government is not producing, I mean, the economy isn't creating enough jobs. There's another thing to run a deficit when you have something like the pandemic. And, you know, the world economy is frozen. And you want to, you want to jumpstart it back into into action,

but running a $2 trillion deficit at a time of prosperity, when unemployment is quite low, near a record, you know, when there is no emergency to counter, that's something very different. So when you ask what's changed, I think one thing it changed is it does seem that nobody cares about the deficit. Nobody ever talks about a balanced budget anymore, which used to be a topic of conversation.

and so forth. And I do think that's a change. And I describe it as profligacy. And, you know, I go back to the analogy of your brother-in-law. And, you know, if your brother-in-law was given a golden credit card, we know he'd buy 10 Ferraris. But, you know, if you're a hard-working guy and you live within your means and you don't have a big balance continuously on your credit card, you may not.

think that's so great, and that may be how other countries are feeling about us. I guess part of the problem here is it's not clear, it's not immediately clear to, to everyday Americans and doesn't seem to be immediately clear to our leadership, what the consequences of running such large fiscal deficits actually is, because so far things have been fine-ish. We don't really know when this thing are implore. I guess what I would ask you is what could those consequences be? What would it look like? Is it possible maybe that the yields would be the thing that whips our leadership into shape

in terms of being more fiscally responsible? First of all, nobody knows because there's no history on what it means for a power like us to run such a big deficit. But they've been running big debts in Japan without major. consequences in the financial markets. But I said in the memo that acute results like a failed auction or something like that are unlikely. And so I think your scenario of continuous rising rates is probably the more likely one. And people just say, you know, U.S., we're not happy with the way you're running your business.

And so if we're going to buy your debts, especially your long debts and be exposed to inflation and the basement of the currency, that is declining purchasing power and declining value versus other currencies, we need risk compensation to do it. And that makes perfect sense. By the way, one thing I didn't mention,

but I think it's very important to mention to put this all in perspective, what we're talking about, Ed, is people talk about how there's, thinking about today's high interest rates. It's very important that everybody recognize that today's interest rates are not high. You know, a 5.3 or 4 percent 30-year bond is very low relative to history. It's only high relative to recent history. And I argue strenuously that the recent history of interest rates is the aberration. And, you know, the Fed Funds,

rate, which is the benchmark for short-term rates, and it's the main lever that is thrown on rates. The Fed can actually, unlike the Treasury with long rates, the Fed cannot, the Fed can actually change short-term rates by changing the Fed funds rate, and it does it all the time. That Fed funds rate was zero most of the time from the beginning of 2009 to the end of 21. That's the aberration. Today's interest rates, you know, I've been around this thing since the 60s, and today's interest rates look low to me, not high. Might that signal then that we might have a lot more room to run here with yields?

I mean, if this is the aberration, if this is the anomaly, and yet when we look at the fundamentals that would result in higher yields, i.e. persistent inflation that does not seem to be coming down anytime soon. spiraling fiscal deficits that is just stacking up and seemingly becoming worse and worse, might that not mean that we're going to see even higher yields? If this is kind of a low relative to the rest of history, would you expect that it would continue to go up? The great problem in the investing and financial world, and I'm going to get a little wonky for a minute here, and I hope that's okay. We have a, we have a qualitative description of what's going on. And then we have an interest rate.

And there's no way to really tell whether the interest rate is appropriate for what's going on in the environment. So today we have the environment I described to you at the outset, and then we have, let's say, a Fed funds rate of three and three quarters and a long bond yield of 5.3 or so. put it on the balance scale. Are those interest rates right for this environment? The answer is can't tell.

So, you know, we usually don't talk about what interest rates should be. We talk about whether they'll probably go up or down. We still can't tell. I think the most important thing is that people have been counting on declining interest rates for a long time, and people look at declining interest rates as a real booster for the markets. And I think the most important thing, and I think the thing we can say with more confidence than almost anything else, but I don't believe in confidence in opinions, is that interest rates probably will not be going down, much if at all in the coming year or two, let's say.

Yes, which spells implications for equity investors. I think there is an open question as to, should people be selling? If, I mean, if we know that higher interest rates generally is not a good thing for stocks. That seems to be a question. You wrote about this in your memo. You say, no, don't sell.

What is your view on this question? That was really, and not in reference to the high rates, that was reference to the debt and deficit problem of the United States. So I think that, as you and I said, the most likely implication of a possible implication, of what's going on with the debt and deficit is a demand for higher interest rates because of the U.S. fiscal behavior

and maybe the right response for that is to reduce your holdings, not of stocks, because this isn't a stock market problem, not of investments in U.S. companies, this is not a company problem, you're holding of dollar denominated assets. You know, that makes some sense. If the dollar is going to deteriorate,

because the government wants to debase the currency, maybe you want to hold less dollar-denominated assets. The problem with that, as I laid out in the memo, is that there are very good reasons to be in dollar-denominated assets. We are still, I think, the best-functioning developed world economy. And so if you trade out of U.S. assets into other countries, companies, or something like that, you have to face the possibility that your fundamental company level possibilities get worse.

It's not an easy decision. And given that the U.S. continues to be, I think, the best functioning developed world economy, if you were going to do any, I wouldn't do very much. Part of the question here seems to be, when will our luck run out? And this is, I mean, you point out, Warren Buffett has made this point. Like, we don't know if this is going to, the reckoning is going to

come in two years or if it's going to come in 20 years. I'm not sure if there's any way to know that, but that seems to be a pretty significant point for investors to grapple with. Do you land anywhere on that spectrum? Do you have any thoughts on how to even address that question? No, there's nothing intelligent to be said about that question. And, you know, usually in the especially in the investment world, where in the investment world, we're not talking about fundamentals, mostly, we're mostly talking about how people feel about fundamentals.

And in the investment world, what I say is we sometimes have an idea what's going to happen, but we absolutely never know when. And I wanted to say earlier in reference to, you know, you said that maybe it seemed this summer like something switched. you know, people seem worry about all of a sudden. There's a great saying in the investment world that things take longer to happen than we thought they would,

but then they happen faster than we thought they could. And that's very true. So, you know, some people like me have been complaining about U.S. fiscal behavior for years and years. Why are people exercised about it now? And again, it has to do with huge. psychology, you know, cognitive dissonance says we can reject information, which is at odds with our basic understanding for a long time. Maybe at some point in time a critical mass is reached where you can't resist your lying eyes anymore and you say, well, I guess that's,

I guess that's the way it is. Maybe that was reached. And, you know, a lot of people said to me this summer, my God, 40 trillion. That's a lot of money for the national debt. nobody ever said to me, oh my God, $39 trillion is a lot or $37 trillion is a lot. Now, maybe it's the roundness of the number 40 or the fact that we, that you change that first digit. But, you know, I do think that I've had, I've had more questions about the national debt since it turned 40 than I did when it was 39. It seems as good a reason as any to care about it. Exactly. Well, that's the point. The point you don't need a very good reason for things to happen. Yes. Just before we let you go here. Treasury Secretary Scott Besson says that the yields do not reflect the fundamentals

of the U.S. economy. He says that basically the bond markets are wrong, or maybe that they're lying. They've got something off about what's happening in America. What do you make of that claim? Are the bond markets, at the very least, reflecting something that is actually true about our situation? Well, you know, there's a joke in the, or is it a song? I forget, which says, who are you going to believe me or your lying eyes? Basically what he's saying is that it's all in response to the inflation, and the problem with the inflation is all about the war. And I haven't seen anybody agree with that.

Maybe there are people who agree with it that I haven't read it, but it just doesn't seem right to me. But as I said, nobody can tell you exactly why the market does what it does. He seems pretty confident for the first time that markets are getting it totally wrong. I'm not sure he has a choice, but to say something like that. Right. Howard Marks is co-founder and co-chairman of Oak Tree Capital Management. Howard, we always appreciate your time.

I recommend everyone go check out the memo that you wrote. Thank you so much for joining us. Thank you, Ed. We'll be right back. And by the way, tune in on Friday, September 25th at 11 a.m. first ever founder series live stream. I'll be speaking with Bending Spoon's CEO and co-founder Luca Ferrari. You can subscribe to access that conversation and many others at profjeemedia.com

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From Academy Award winner Ben Affleck, Animals stars Affleck, Carrie Washington, Jillian Anderson, and Stephen Young. When a Los Angeles mayoral candidate's son is kidnapped, he and his wife are pulled into a web of deception, forced to make choices that could tear their world apart. Watch Animals only on Netflix on October 9th, rated R. So like any good millennial, I have a love-hate relationship with Gen Z. It's the phenomenon rattling millennials. They just look at you. They want something bigger themselves. Lifestyle is a priority.

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We're back with Prof G Markets. In a speech at the United Nations General Assembly on Tuesday, President Trump said that he could, quote, annihilate Iran. Iran's president, Masoud Peschekian, took to the same podium yesterday. He said, quote, we will never bow our head or bend at the knee. Despite these clashing speeches, U.S. officials held talks with Iran's delegation earlier this week. Trump now says he expects a deal with Iran after the midterm elections, but Iran is still keeping the strength. of Hormuz closed, and the United States continues to blockade Iranian ports. Brent Crude now sits above $103 per barrel up more than 40% since the beginning of the war. So here to break down where we are actually at in this potential deal with Iran. We're speaking with Dan Baer, the former U.S. ambassador to the Organization for Security and Cooperation in Europe. He is also the interim president of the Carnegie Endowment for International Peace.

peace. Dan, thank you for joining us on Prof G Markets. We are getting very mixed signals from Iran, from Trump, from the government, on where we are actually, what our talks with Iran actually look like right now. What is your view on where we are? I think you laid it out quite well. I think one of the more surprising parts to me was the way that the president telegraphed that he didn't expect a deal until after the midterm elections. It may be his private expectation, but the way he telegraphed it, it's hard to discern what the rationale was to kind of expose that vulnerability. Obviously, the Iranians are well aware that the president is underwater politically, in part

because of the war, and large part because of the war and the knock-on effects on prices here at home. And so it seems strange to acknowledge that vulnerability publicly. I also remember that there have been multiple times where the president has come out either with very strong words or has said that they're working on diplomacy and has said one thing and gone another way. So it wouldn't surprise me if those talks that were happening, even as these tempestuous speeches were being given, if those talks did eventually, before the elections even bear some fruit in terms of progress towards a progressive reopening of the strait. J.P. Morgan put out a research note recently saying that they basically cannot predict what's going to happen here. Their job is to predict and create a base case scenario and they have said uncle and they're throwing in the towel and they're not going to do it. We spoke with oil experts on this show who agree. There's no way to know what's going to happen here. Do you have any sense? Would you be able to make sense of what might happen or at least what is most likely? to happen going forward? Trying to make predictions about when and what the terms of a deal would be is very difficult,

and I understand why others who spend their whole time looking at things like this with enormous amounts of money on the line have thrown up their hands. I do think there are some things that we know, which aren't really predictions, but we know that even if there were a deal that, quote-unquote, fully reopen the straight-of-four-moos, it would take some time both to work through the backlog and also for there to be enough trust that the straight is actually safe for shipping. There will be added insurance costs. We can make some assumption that there's going to be some kind of added cost either

in much more insurance or in some kind of tolling mechanism. And so I think we can make the prediction that the energy prices are unlikely, that the price of crude is unlikely all other things equal to come back down to those pre-war levels. we are going to see a medium term, at least increase in cost, and that's going to ripple through the various knock-on effects, not only obviously in fuel, but also fertilizer and other derivative products. What have been some of your other takeaways from this United Nations General Assembly, either about Trump or about Iran or about anything else?

And I ask that, knowing that you literally just met with President Zelensky of Ukraine, what are some of your other takeaways? Well, in terms of what the world should be focused on, I really do think we should be focused on what seems to me to be a double whammy for the many of the most vulnerable people on Earth. The first being the effects of the Iran War and the way that that has driven up prices, including the price of diesel,

which obviously is used to transport food, among other things around the world. And the second of which is the wheat export, which should be starting in the coming months, month or so from both Russia and Ukraine. And with the Black Sea paralyzed by that war, that's going to make it much harder to export wheat. And that is going to have knock on effects. There are going to be millions of people who are going to have either very much more expensive food or no food at all. And I think preparing ourselves for that double whammy and trying to do some diplomacy that can

sort out a deal between Putin and Zelensky between Russia and Ukraine to have a ceasefire on energy and a ceasefire on striking food exports would be really important as a priority. We'll end on a question about the midterms here. I mean, Trump has related these Iran talks to the midterms, saying that he expects a deal after the midterms. To what extent will the midterms play any role in these talks with Iran?

To what extent is this really a political conversation? That also is hard to predict. I can say that, I mean, obviously, President Trump and the Republican Party are watching in real time as they see poll numbers come in, the costs of this war politically. I guess I hope that there continues to be a strong effort by the White House to resolve the conflict before the midterms, because I think the incentives are there for them before the midterms to show some deliverable, some abatement of this war. And after the midterms, if they pay a huge political price, the immediate near-term political incentive to drive towards some kind of resolution, might be less. And so I do think the midterms play a role. I think the Iranians, I think sometimes

Americans don't recognize how much both our partners and our adversaries around the world watch American politics and are very conscious of the vulnerability of an American president going into midterms or re-election campaign. And they know that that political pressure has an impact on what is offered at a bargaining table. Daniel Bayer is the former U.S. ambassador to the Organization for Security and Cooperation in Europe. He's now interim president of Carnegie Endowment for International Peace. Dan, thank you very much. Thanks for having me.

AI Data Center provider SB Energy is officially delaying its IPO. The company was supposed to go public this month, but according to the New York Times, its bankers were struggling to find enough buyers at the target valuation of $50 billion. The company is reportedly waiting for a change in investor sentiment towards data centers, which is another way of saying that investors weren't really buying their BS, and now they need to figure out a new way to package it, because let's be clear, this company is BS. Despite calling themselves a data center company, they currently have zero data centers in operation. The rest are under construction, but not really, because actually less than a tenth of them are

actually under construction, the other 90% haven't even broken ground. Meanwhile, this company is claiming that they have a revenue backlog of more than $400 billion, which sounds pretty good, but then you realize that only $1 billion of that is expected to be recognized within the next two years, and more than 80% of it is expected to materialize more than eight years from now. In fact, some of it is expected to arrive in more than 20 years. What little revenue they actually do have, mostly comes from their solar business, which is, wait for it, shrinking. Solar revenue fell more than 8% last year at SP Energy. And despite all of this, the company wants investors to believe that it is worth $50 billion,

that it is more valuable than PayPal, more valuable than Honda, more valuable than Chipotle. The good news is investors clearly are not buying it. the bad news is SB Energy still believes that eventually they will. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by

Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Chalon, Kristen O'Donohue and Mia Silverio, and our social producer is Jake McPherson. Thank you for listening to Prof G Markets from ProfgMedia. If you liked what you heard, give us a follow.

I'm Ed Elson. tune in tomorrow for our conversation with Alex Bors.