Euro zone bond yields jump after Fed cuts but signals caution
Updates at 0900 GMT
By Greta Rosen Fondahn
Dec 19 (Reuters) -Euro zone bond yields jumped on Thursday, a day after the U.S. Federal Reserve cut interest rates as expected but signalled it would slow the pace of easing in 2025.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 5 basis points (bps) to 2.284%, touching its highest level since Nov. 22. Yields move inversely to prices.
Italy's 10-year yield IT10YT=RR rose to its highest since Nov. 26, and was last up 7 bps at 3.467%.
The gap between Italian and German bond yields DE10IT10=RR widened 4 basis points to 118 bps.
The Fed cut interest rates by 25 bps as expected on Wednesday, but Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering inflation.
Powell said the decision to lower the policy rate to the 4.25%-4.50% range this time was a "closer call" than implied by financial markets that considered the cut a near certainty ahead of the meeting.
At the same time, markets are already eyeing the prospects for sweeping economic changes under a Trump administration and the impact that could have on inflation.
"A bit more hawkish Fed than anticipated, but still a lot up in the air because there is still dependency on what exactly Trump does," Lyn Graham-Taylor, a senior rates strategist at Rabobank, said.
Money markets now price in just 34 bps in easing from the Fed in 2025.
The Fed strongly influences the U.S. government bond market, which sets the tone for borrowing costs around the world.
U.S. Treasury yields surged on Wednesday, with the 10-year yield DE10US10=RR rising to its highest level since late May after the rate decision. The 10-year yield was up 2 bps at 4.518% on Thursday.
The spread between U.S. 10-year Treasuries and German bunds DE10US10=RR narrowed 3 basis points to 223 bps.
Germany's two-year bond yield DE2YT=RR, sensitive to European Central Bank rate expectations, rose 1 bp to 2.05%.
Earlier on Thursday, the Bank of Japan held interest rates steady. The Bank of England is expected to do the same later in the day.
Reporting by Greta Rosen Fondahn; Editing by Peter Graff and Subhranshu Sahu
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