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Bunds extend selloff on Germany's plans for higher

spending

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Markets price in higher growth, fewer ECB rate cuts

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Euro area sovereign bond spreads roughly unchanged

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Market gauge of inflation expectations at highest since

July

By Stefano Rebaudo

March 6 (Reuters) - Benchmark Bund yields rose on

Thursday after recording their biggest daily rise in more than

25 years the day before, as Berlin's plans for a huge spending

package led investors to expect a sharp increase in German bond

supply.

Germany is in for a massive ramp-up in spending, with a 500

billion euro special fund sought for infrastructure and plans to

unshackle defence investment from restrictive borrowing rules.

"Given inevitable lags in fiscal policy, additional spending

could only start to filter through to the economy later this

year and into 2026," said Mark Haefele, chief investment officer

at UBS Global Wealth Management.

"But despite these caveats, the bold fiscal plan has the

potential to boost growth and support euro zone assets," he

added, mentioning a possible lift to confidence and an improving

backdrop for equities.

Yields on 10-year Bunds were up 7 basis points

at 2.86%, after hitting 2.929%, their highest since October

2023. They jumped more than 30 bps on Wednesday, recording the

biggest daily rise since May 1997.

Markets are confident the European Central Bank will cut its

key interest rate by 25 basis points to 2.5% at its meeting

later on Thursday, but have scaled back bets on future cuts as

they expect higher government spending to boost growth and

inflation.

Markets are pricing in around 50% chance of another cut in

April and a depo rate of 2.05% in December

, from 1.92% late on Tuesday.

A key market gauge of long-term euro zone inflation

hit 2.2856%, its highest since July 2024.

"We are less sure it (change in German fiscal regime) will

prevent the ECB from cutting to 2%, and below, this year," said

Jamie Searle, European rates strategist at Citi.

He cited several factors supporting this view, including

U.S. tariffs on Europe likely coming on April 2, negative growth

developments, the disinflationary effect of falling oil prices,

and the expected delay in fiscal spending implementation.

Germany's 2-year yield, more sensitive to ECB

policy rates, dropped one basis point, after rising to 2.319%,

its highest since mid-January earlier on. It rose 22.5 bps on

Wednesday, in its biggest daily jump since March 2023.

Other euro area bond yields followed Bunds, leaving spreads

roughly unchanged.

Analysts argued that joint European Union borrowing for new

investments would be crucial to support government bond prices

of highly indebted countries such as Italy and France.

The yield spread between French and German bonds

was steady at 70 basis points, at the lower end of

its recent range.

The yield gap between Italian and German bonds

- a market gauge of the risk premium investors ask to hold

Italian debt - widened 2.5 bps to 106 bps, after dropping below

100 bps for the first time since 2021 the day before.