IMF’s No. 2 Warns on ‘Fragile’ Bond Markets (FULL)

IMF First Deputy Managing Director Gita Gopinath is completing her tenure tomorrow, preparing for a new role at Harvard University.

In an exit interview with Bloomberg, she says "Everybody agrees that central bank independence is critical. Monetary policy independence is critical. So if we are not seeing much market reaction, it must be that people think that, well, that independence is still intact."

International Monetary Fund Deputy Managing Director Gita Gopinath warned against complacency over levels of borrowing in the global economy, saying that bond markets are “in a fragile place.”

“Debt levels are incredibly high — they are ever-increasing,” Gopinath said in an interview with Bloomberg Surveillance on Thursday. “While in the past, you might have said, ‘So what? Markets will take it,’ that’s not the case any more, even in advanced economies.”

Gopinath, who’s stepping down as the IMF’s No. 2 official this week and returning to a position at Harvard University, pointed to signs of debt concern in French and UK bond markets, “and also in terms of long yields in the US.”

France’s 30-year bond yields hit a 14-year high this week as investors expressed concern about that nation’s political struggle to enact a budget that puts Paris on track to meet a fiscal-deficit target. In Britain, 30-year government bond yields have been hovering near the highest levels since 1998, piling pressure on Prime Minister Keir Starmer to rein in borrowing. US 30-year yields are trading well above their average of recent years.

“Bond markets are in a fragile place, you have valuations in equity markets that are sky high — so I would say tread carefully,” said Gopinath, who previously served as the Washington-based IMF’s chief economist.

ed Independence

She cautioned against drawing comfort from the lack of a financial crisis in recent years “despite the pandemic, despite wars, despite geoeconomic fragmentation, despite Fed rates going up very sharply.”

“We’ve not had a financial crisis — that doesn’t mean that that will never happen,” she said.

Asked about perceived threats to the Federal Reserve’s independence, Gopinath pointed to a relative lack of reaction in markets this week as a signal that investors still see the US central bank as autonomous. At the same time, she judged that “everybody is on wait-and-see mode.”

President Donald Trump earlier in the week moved to oust Fed Governor Lisa Cook, sparking concerns about a broader initiative by the administration to revamp Fed leadership and push interest-rate cuts.

“It must be that everybody still believes that independence, especially operational independence, in terms of setting monetary policy rates, will be maintained,” Gopinath said of the relative market calm. “I think there’s more to worry about than what the markets are showing right now. But again, we should have to wait and see.”

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