German long-term yields set for biggest weekly rise in four months amid fiscal spending boost

By Linda Pasquini

June 27 (Reuters) - German 30-year government bond yields were on track for their biggest weekly increase in nearly four months after rising this week on expectations of increased borrowing by Germany's government.

German lawmakers on Thursday passed a multibillion-euro package of measures to boost investment, part of the new government's plans to return Europe's largest economy to growth.

Markets are pricing in increased bond supply from Germany to fund such plans, which is expected to push longer-dated bond yields higher.

German 30-year government bond yields DE30YT=RR have risen 10 basis points this week, heading for their biggest weekly gain since March 3. They were marginally higher on the day at 3.094%, after hitting their highest since May 26 at 3.111% on Thursday.

The 10-year yield DE10YT=RR was up 1 bp at 2.575%, while the 2-year yield DE2YT=RR – more sensitive to European Central Bank policy rate expectations - was up 2 bps at 1.84%, recouping most of the fall in the previous session.

The ECB lowered its deposit rate this month, but signalled it was done with rate cuts for now after lowering borrowing costs eight times in just over a year.

The central bank is on track to meet its 2% inflation target, ECB Vice President Luis de Guindos said on Friday, as investors shrugged off stronger than expected inflation figures in France and Spain earlier in the session.

"We had inflation figures this morning, which were a bit stronger than the market was looking for, but not too significant," said Peter Schaffrik, chief European macro strategist at RBC.

He added that typically bond markets are "a bit quieter" going into the end of the month.

Italy's 10-year bond yield IT10YT=RR was 1 bp higher at 3.498%.

The last day of June on Monday will see a slew of economic data out of Germany, including closely-watched consumer prices.

Meanwhile, weak U.S. jobs data and speculation of faster interest rate cuts by the Federal Reserve - after reports that President Donald Trump could name a replacement for Fed Chair Jerome Powell soon - sent U.S. Treasury yields lower on Thursday.

They were up on Friday, with the yield on the 10-year note rising 2 bps to 4.273%.

Treasury yields are a bit higher on the back of China-US trade hopes and news about U.S. Treasury Secretary Scott asking Congress to drop 'retaliatory' tax, said Lyn Graham-Taylor, senior rates strategist at Rabobank.

"I think those caused a little bit of a selloff in U.S. Treasuries."