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Euro zone bond yields jump as Germany agrees debt overhaul

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Changes imply much higher borrowing via bond markets

(Updates after news of German debt deal)

By Harry Robertson

LONDON, March 14 (Reuters) - Euro zone bond yields rose

sharply on Friday after Germany's chancellor-in-waiting

Friedrich Merz thrashed out a deal with the Green and Social

Democrat parties to overhaul the country's debt rules and

massively boost state spending.

Germany's 10-year bond yield, the benchmark for

the euro zone bloc, rose to 2.932%, coming within a whisker of

the 17-month high of 2.938% touched earlier this week. It was

last up 6 basis points at 2.911%.

Merz reached an agreement with the Greens on Friday ahead of

a parliamentary vote on reforming the borrowing rules next week,

a source close to the negotiations told Reuters. A debt deal

compromise is now being examined by finance ministry officials,

parliamentary sources said.

Yields soared earlier this month as investors learnt of the

plans, which would mean much more borrowing via bond markets.

Germany's 30-year bond yield on Friday surged to

its highest since October 2023 at 3.247% and was within touching

distance of its highest since 2011. Yields move inversely to

prices.

RBC Capital Markets analysts said on Thursday they expect

the 10-year German bond yield to finish the year at 3.25%.

"(We) think the combination of a boost to the economy and

larger funding needs argued for higher yields as the year

progresses," the analysts said in a note.

Other euro zone yields also rose, with Italy's 10-year yield

hitting its highest since July at 3.992%, up around

5 bps.

The spread between U.S. 10-year Treasuries and German Bund

yields fell to 138 bps. It dropped to around 130

bps earlier this week, its lowest since July 2023.

U.S. bond yields have fallen due to concerns about the

impact of President Donald Trump's tariffs on the economy.

Investors were also waiting for a French credit rating

decision by agency Fitch, which is due after markets close.

In October Fitch revised France's outlook to "negative" from

"stable" on Friday, citing increases in fiscal borrowing and

political risks.

A budget has since been passed in France but spending needs

remain elevated as the United States insists Europe takes on

more of the security burden.

French 10-year bond yield was in line with other

markets on Friday, up around 5 bps at 3.602%.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, was up 3

bps at 2.212%.