Bund yields jump to 4-week high after Fed signals caution

By Greta Rosen Fondahn

Dec 19 (Reuters) - Euro zone long-dated government bond yields jumped on Thursday, after the Federal Reserve cut interest rates but signalled it would slow the pace of easing in 2025.

Germany's 10-year yield, the euro area's benchmark, rose 7 basis points to 2.31%, after touching 2.322%, its highest level since Nov. 22. It rose 1 bp on Wednesday. Yields move inversely to prices.

The yield gap between U.S. 10-year Treasuries and German Bunds narrowed slightly on Thursday to 224 bps, after hitting 227 bps early in the session, after the surge in U.S. Treasury yields.

Ten-year Treasury yields rose to their highest since May. The yield was up 6 bps to 4.56%, after jumping more than 11 bps the day before.

The divergence between euro zone and U.S. government bond markets has been steadily widening since September, reflecting different interest rate outlooks, as the Fed is cautious about further rate cuts, while a lacklustre European economy pressures on the European Central Bank to cut interest rates more.

The Fed cut interest rates by 25 bps as expected on Wednesday, but Chair Jerome Powell said more reductions in borrowing costs 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.

Italy's 10-year yield rose to its highest since Nov. 26, and was last up 8 bps at 3.479%.

The gap between Italian and German bond yields widened 3.5 basis points to 117 bps.

Germany's two-year bond yield, sensitive to European Central Bank rate expectations, rose 2 bps to 2.06%.

Earlier on Thursday, the Bank of Japan and the Bank of England held interest rates steady. (Reporting by Greta Rosen Fondahn; Editing by Peter Graff, Subhranshu Sahu, Chizu Nomiyama and Alison Williams)