(Updates in late European trading)

By Stefano Rebaudo

March 24 (Reuters) - Euro area yields rose slightly on

Monday after Purchasing Managers' Index data met expectations,

as investors balanced risks from U.S. tariffs against

expectations of stronger growth stemming from Germany's

investment plans.

U.S. bond yields

climbed

as investors moved out of fixed income and into stocks on

the back of optimism that U.S. President Donald Trump's April 2

tariffs would be narrower than expected. That also pushed up on

euro zone yields.

Investors had forecast German PMIs would rise sharply after

the government laid out plans for a surge in infrastructure and

defence spending. They had also expected the weak survey for

France as political uncertainty continued to weigh.

Euro zone business activity grew at its fastest pace in

seven months in March, supported by an easing in the

long-running manufacturing downturn.

Trump said there will be some flexibility in the tariff

policies that the U.S. administration should impose early next

month.

Markets were also watching negotiations over a possible

ceasefire in Ukraine as Russian and U.S. delegations began talks

in Riyadh, Saudi Arabia, on Monday morning.

"The March picture that the PMI paints is one of modest

improving growth with easing inflation," ING economist Bert

Colijn said.

"However, next week could already upend that picture as U.S.

tariff announcements and possible European retaliation may

change the economic landscape significantly."

Germany's 10-year government bond yields rose 2

basis points to 2.786%. They had reached 2.746% on Friday, their

lowest level since March 5.

Markets priced in a European Central Bank depo rate at 1.98%

at the end of 2025 and 2.02% in July next

year.

They briefly bet on an 80% chance of a rate hike in summer

2026. The ECB euro short-term rate forwards indicated a deposit

rate of 2.2% in July 2026, and 2% in December 2025.

Germany's 2-year yields, which are sensitive to

European Central Bank policy rates, were flat at 2.134%.

ECB board member Piero Cipollone said on Monday that key

elements such as energy price declines and the euro appreciation

strengthened the case for further interest rate cuts.

Italy's 10-year yields rose 1 basis point to

3.831%. The gap between Italian and German government bond

yields was 104 bps.