LONDON, March 3 (Reuters) - Euro zone longer dated bond

yields rose on Monday, and the German yield curve was at its

steepest since 2022 as traders processed the weekend's

geopolitical developments, which will likely require greater

European borrowing to spend on defence.

Germany's 10-year Bund yield, the euro zone

benchmark, rose 10 basis points to 2.49%, and the 30-year yield

rose 12 bps to 2.81%, set for its biggest daily rise

since April.

The move was partly a rebound from Friday's two-week lows

for both the 10- and 30-year yields, but also came after

European leaders agreed at Sunday's summit in London that they

must spend more on defence.

The European Commission chief suggested the bloc could ease

rules that limit debt levels.

In addition, Reuters reported, citing sources, that the

parties in talks to form Germany's new government are

considering quickly setting up two special funds, potentially

worth hundreds of billions of euros, one for defence and a

second for infrastructure.

"The defence story continues to run, and so the idea is

that greater defence spending requires more borrowing in

Germany, so higher debt issuance," said Kenneth Broux, head of

corporate research FX and rates at Societe Generale.

The same trend was seen even more dramatically in stock

markets, where defence names such as BAE systems,

Thales and Rheinmetall were all up over 10%.

"Though, for me, I'm not sure how far this runs, the

story is really U.S. tariffs," Broux cautioned. "A trade war is

more decisive for where the ECB stops cutting rates and where

bond yields go."

U.S. President Donald Trump said last week his

administration would soon announce

a 25% tariff on imports from the EU.

Broux also noted Monday's rise in yields had come after

falls last week. The 10-year yield dipped to 2.374%, and the

30-year to 2.358%, both their lowest in about two weeks.

STEEPER CURVE

Nonetheless, in the short term, there was a clear move

towards a steeper yield curve, meaning that investors were

demanding a greater premium to hold longer-dated than short-term

debt.

The German two-year yield was up 7 bps at 2.09%

on Monday, meaning the 10-year yield was as much as

41 bps higher than the two-year, the steepest difference since

October 2022, before the ECB began its latest round of rate

increases.

Also notable was the contrast with the United States,

where fears about the health of the economy and growing

expectations of several Federal Reserve rate cuts this year have

been pushing yields down.

German 10-year yields were last 178 bps below those of

U.S. Treasuries, the smallest gap since October.

Longer-dated bonds were under selling pressure elsewhere

in Europe too. Italy's 10-year yield was 7 bps

higher at 3.53%.

As well as geopolitics, investors were processing

euro zone inflation data

released on Monday.

Inflation dropped a bit less than expected last month

but its most closely watched component did also fall,

reinforcing the case for another ECB interest rate cut on

Thursday.