LONDON (Reuters) - German Chancellor-in-waiting Friedrich Merz reached an agreement with the Greens on Friday on a massive increase in state borrowing just days ahead of a parliamentary vote next week, Reuters reported, citing a source close to the negotiations.

German shares rose on the news, with the blue chip Dax index over 2% higher on the day, while mid and small-cap stocks rose over 3%.

The euro also strengthened and was last up 0.5% at $1.0904,, while Germany's 10-year bond yield, rose 7 basis points to 2.93%.

COMMENTS:

ROHAN KHANNA, HEAD OF EURO RATES STRATEGY, BARCLAYS, LONDON:

Bond markets have generally been of the view that the package will be approved and hence 10-year Bund yields have not retracted at all after the sharp increase last week.

Recent news reports which suggest that they are close to a deal have resulted in a further sell-off in EGBs (European government bonds) and this pressure should persist for now.

With this sell-off, the yield curve has also continued to steepen as the markets price improved growth and inflation in the medium-term requiring the European Central Bank to hike policy rates. As things stand, markets expect the ECB to cut rates to 2% before the end of this year and then increase them to 2.5% by end of 2027.

NICHOLAS REES, HEAD OF MACRO RESEARCH, MONEX EUROPE, LONDON:

"They've managed to get over the first hurdle. There are a lot of challenges still to come. In Germany it takes a long time to spend money. So, despite the fact markets are very optimistic right now, we think they're going to be disappointed."

"If it takes them a while to deploy cash, it's going to take a while to feed through for growth. What you do get is a big uptick in borrowing costs, which is going to weigh on growth."

"We certainly expected euro-dollar to retrace lows, we're looking for euro-dollar to hit $1.03, as the market starts to price out some of these easing expectations in the U.S., as it becomes apparent these recession fears are overblown... and we've still got tariffs coming (on Europe)."

CHRIS TURNER, GLOBAL HEAD OF MARKETS, ING, LONDON:

"I think most of the market thought it (the fiscal reform) would go through. If we see confirmation today, rather than Tuesday, that it's gone through, then we're preempting some of the gains from next week."

"Our rates strategy team think Bund yields are going to 3.2% and for the euro-dollar maybe $1.0950 might be the top. Big picture we see a range of $1.05-$1.10 and we think tariffs in April are going to be negative for the euro."

"But, in the short-term all the focus is on this fiscal deal going through."

ANDREAS BRUCKNER, EUROPEAN EQUITY STRATEGIST, BANK OF AMERICA, LONDON:

"The market of course loves this news because they need the Greens to push through this fiscal package."

"Everything related to German fiscal (policy) is basically up - also cap goods, defence stocks are driving this as well, an overall pro-cyclical rotation, I think a 1.2% outperformance of cyclical versus defensives, of course on the back of major underperformance yesterday."

"So, there's also a bit of reversal of yesterday's broadly risk-off moves on the sector front."

STEFAN BRUCKBAUER, CHIEF AUSTRIAN ECONOMIST, UNICREDIT, VIENNA:

"Overall it's great news in general for the Austrian economy as Germany is our main trading partner and more than 7% of our GDP comes from Germany, this is more double amount than the U.S."

"Looking at all these changes, especially in the U.S., it's good news for us that our main export market is starting to invest. Although there are some negative effects also, we have seen increasing interest rates on the long end."

RICHARD MCGUIRE, HEAD OF RATES STRATEGY, RABOBANK:

"The deal had been anticipated as indicated by the violent selloff in bonds last week."

"The additional upward impetus in yields is limited."

"What would be interesting to see is if the 3% ceiling for Bund yield breaks before these plans come into fruition."

"This is positive for Germany but there are questions marks on how quickly the plans can be delivered. The speed at which the funds can be deployed is questionable."

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON:

"Short term it's another positive driver for the euro, but we'd be wary about getting too excited about the news, the market was already expecting it to come before next Tuesday."

"It takes the risk of a disappointment off the table, and allows the euro to drift a bit higher."