March 5 (Reuters) - German long-dated bonds suffered

their worst selloff in years and the euro jumped to its highest

level in almost four months after the German conservatives and

the Social Democrats (SPD) agreed to seek a loosening of

Germany's debt brake.

European shares bounced back on Wednesday after their worst

day in more than six months.

Germany aims to allow higher defence spending and propose

the creation of a 500 billion euro infrastructure fund, their

leaders said on Tuesday.

"'Don't underestimate Germany's capacity to change' was our

hypothesis into the year and just as most people gave up on

Europe," said Maximillian Uleer, strategist at Deutsche Bank.

"Today, Germany announced a 'whatever it takes' plan,", he

argued, adding: "Is Make Europe Great Again (MEGA) the new

MAGA?"

Germany's 10-year yield, the euro area's benchmark, climbed

19 basis points (bps) to 2.67%, in its biggest daily rise since

mid-March 2020, at the height of the pandemic crisis.

Germany's 30-year yield was up 16 bps after

rising almost 25 bps to 3.07% in its biggest daily jump since

October 1998.

"Higher spending is likely to weigh on the longer end of the

curve. We thus close our long duration call on Bunds," Deutsche

Bank's Uleer added.

Money markets reduced their bets on European Central Bank

rate cuts, pricing in a depo rate of 2% in December

from 1.92% late Tuesday.

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

policy rates, rose 13.5 bps to 2.15%.

"This proposal (to loosen the debt brake) could ultimately

mean even more new debt than the earlier media reports about a

combined 900 billion euros package for defence and investment,"

said Christoph Rieger, rate strategist at Commerzbank, arguing

that "the military component is in principle unlimited."

"Moreover, the measures could also give the future

governments more fiscal space beyond military and investment in

the upcoming budgets," he added.

The spread between the risk-free 10-year overnight index

swap (OIS) and Bund yields dropped to -23 bps, its

lowest level since August 2010.

The single currency jumped as investors eyed the prospective

increases in fiscal spending, which could boost the economy.

The euro was up 0.5% at $1.068, its highest since

November 11, jumping by almost 3% since Monday.

The single currency's rise against the yen was more

moderate, climbing 0.13% at 159.40.

"The euro/dollar broke decisively higher on prospects of a

fiscal bazooka out of Europe. The speed with which the Europeans

are moving is impressive, especially in Germany," said Chris

Turner, forex strategist at ING.

"Expect much focus now on whether the agreed fiscal changes

in Germany move swiftly and easily through parliament over

coming weeks," he added.