March 6 (Reuters) - German government bond yields jumped

on Thursday after recording their biggest daily rise in more

than 25 years the day before, as investors expected a sharp

increase in Bund supply due to more fiscal spending.

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 its debt rules.

Bund yields, the euro area's benchmark, were up

10 basis points at 2.88%, after hitting 2.929, its highest since

October 2023. They jumped by 30 bps the day before, the biggest

daily rise since May 1997.

Meanwhile, investors scaled back their bets on future

European Central Bank rate cuts as they expected fiscal spending

to boost growth and inflation.

They priced in a depo rate of 2.12% in December

, from 1.92% late on Tuesday, and less than

a 50% chance of an easing move in April.

Analysts forecast a 25 bps rate cut from the ECB at the

policy meeting later on Thursday, which would bring the depo

rate to 2.5%.

"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, rose 8 bps to 2.09%. It rose 23 bps the day

before, in its biggest daily jump since March 2023.

Euro area non-German government bond yields followed Bunds,

with 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 gap between Italian and German bonds

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

Italian debt - was at 103 bps, after dropping below 100 bps for

the first time since 2021 the day before.

The yield spread between French and German bonds

stood at 68 basis points, at the lower end of its

recent range.