Euro zone bond yields rise as markets eye higher defence spending

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 DE10YT=RR, 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 IT10YT=RR touched its highest since Jan. 31. It was last up 5.5 bps at 3.573%.

The gap between Italian and German yields DE10IT10=RR stood at 107.5 bps.

Germany's two-year bond yield DE2YT=RR, 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.