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Investors weigh higher defence spending for Europe

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European leaders hold emergency summit on Ukraine

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Extra defence spending likely financed through bond

issuance,

analyst says

(Updates in European mid-morning trade)

By Greta Rosen Fondahn

Feb 17 (Reuters) - Euro zone government bond yields rose

on Monday as markets watched political developments around a

potential peace deal in Ukraine and weighed the prospect of

increased European defence spending.

French President Emmanuel Macron will host European leaders,

including Britain's prime minister, on Monday for an emergency

summit on the Ukraine war.

Europe will not have a seat at the table for Ukraine peace

talks, U.S. President Donald Trump's Ukraine envoy said on

Saturday.

"Whichever way the peace process goes, it is clear that

Europe will need to increase spending on defence to provide

security to Ukraine," said Mohit Kumar, an economist at

Jefferies.

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

the euro zone bloc, rose to its highest since Jan. 31, and was

last up 6.5 basis points (bps) at 2.489%.

Yields move inversely to prices.

"The market is realising ... that defence is a priority for

Europe, and any additional defence spending will likely be

financed through more bond issuance," said Emmanouil Karimalis,

a macro rates strategist at UBS.

"Ceteris paribus (all things being equal), this implies

higher rates, higher term-premia and a steeper curve. This is

why the market is selling off today," Karimalis added.

Italy's 10-year yield touched its highest since

Jan. 31. It was last up 5.5 bps at 3.573%.

The gap between Italian and German yields

stood at 107.5 bps.

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

sensitive to European Central Bank rate expectations, was up 3

bps at 2.14%.

Investors are also readying for Germany's snap election on

Sunday.