Euro zone borrowing costs rise as investors see more defence spending ahead

LONDON, Feb 18 (Reuters) - Longer-dated euro zone yields rose to two-week highs on Tuesday, extending the increases of the previous day when investors sold bonds on expectations that European governments would ramp up issuance to fund bigger defence spending.

German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 3 basis points (bps) to 2.51%, its highest since Jan. 31.

The euro zone benchmark rose 6 bps on Monday following remarks by European leaders that they would have to hike defence spending in response to the U.S. being less willing to take the lead on Europe's defence, likely requiring greater borrowing.

Eyes also remained on the Saudi capital, Riyadh, where U.S. and Russian officials are due to meet to discuss ending the Ukraine war. Europe may play a role in supporting Ukraine's security after any peace deal, underscoring the need for more military expenditure.

​ Italy's 10-year yield IT10YT=RR was last higher by 2 basis points​ at 3.57%. It touched 3.60% in early trade, also its highest level of the year.

Shorter-dated yields, which are more sensitive to expectations over central bank policy than long-term developments, moved less. Germany's two-year yield DE2YT=RR was about 1 bp higher at 2.15%.