German 30-year yields set for biggest daily rise since late 1990s

By Stefano Rebaudo

March 5 (Reuters) - Euro zone bond yields jumped, with 30-year German yields on course for their biggest one-day rise since the late 1990s, after the parties hoping to form Germany's next government agreed to seek a loosening of the country's debt brake.

Germany aims to allow higher defence spending and will propose the creation of a 500 billion euro ($533.25 billion) infrastructure fund, the leaders of the conservatives and the Social Democrats (SPD) said on Tuesday.

Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, rose 21 basis points to 2.70%.

"This proposal could ultimately mean even more new debt than the earlier media reports about a combined 900 billion euro 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 future governments more fiscal space beyond military and investment in the upcoming budgets," he added.

Germany's 30-year yields DE30YT=RR rose almost 25 bps to 3.07% in their biggest daily climb since October 1998.

Money markets reduced their bets on European Central Bank rate cuts, pricing in a depo rate of 2% in December EURESTECBM7X8=ICAP from 1.92% late Tuesday.

Germany's 2-year yield DE2YT=RR, more sensitive to European Central Bank policy rates, rose 13 bps to 2.14%.

The spread between the risk-free 10-year overnight index swap EUREON10Y= and Bund yields dropped to -22 bps, its lowest level since February 2011.

($1 = 0.9376 euros)