JGBs fall as Bessent's 'behind the curve' comments drive BOJ rate hike bets

By Junko Fujita

TOKYO, Aug 14 (Reuters) - Japanese government bonds fell on Thursday as U.S. Treasury Secretary Scott Bessent's comments stoked expectations of a policy shift by the Bank of Japan.

The five-year yield rose 3.5 basis points (bps) to 1.1%, its highest level in two weeks.

The 10-year JGB yield rose 3 bps to 1.545%, its highest since August 1.

Yields move inversely to bond prices.

Bessent told Bloomberg Television that the BOJ will likely be raising interest rates as it is behind the curve in dealing with the risk of inflation.

The U.S. Treasury Secretary's remarks contrast with those of BOJ Governor Kazuo Ueda, who has repeatedly brushed aside the view the central bank was being too slow in raising rates and could be late in forestalling too-high inflation.

Investors are wary of potential BOJ interest rate hikes after Bessent's comments, said Takafumi Yamawaki, head of Japan rates research at J.P. Morgan Securities.

JGB yields had eased from their highs in July as expectations of a rate hike by the BOJ receded, due to the central bank's focus on persistent risks to the economic growth outlook.

Swap rates indicate a 62% chance of the BOJ raising its policy rate by 25 bps to 0.75% at its policy meeting in December, with lower than 50% odds of a hike before then.

Traders see about an 80% chance of the policy rate touching 1% by the end of 2026, according to a broker Ueda Tradition Securities.

Yields also pushed higher after a lacklustre auction of five-year bonds in the previous session, J.P. Morgan Securities' Yamawaki said.

The auction received the lowest demand in more than five years, reflecting thin liquidity during Japan's "Obon" holiday season.

The 20-year JGB yield rose 2 bps to 2.545%.

The 30-year JGB yield fell 0.5 bp to 3.08%.

The 40-year JGB yield rose 0.5 bp to 3.295%.

(Reporting by Junko Fujita; Editing by Ronojoy Mazumdar)