Bund yield just off 17-month high as Merz seeks deal to increase fiscal spending

By Stefano Rebaudo

March 12 (Reuters) - The euro area's benchmark Bund yield was just off a 17-month high on Wednesday as Germany's likely next chancellor, Friedrich Merz, worked to secure support for a massive increase in state borrowing amid optimistic comments by party negotiators.

The clock is ticking for Merz to persuade lawmakers in the outgoing parliament to back plans to unshackle Germany's tight borrowing limits in a bid to revive its economy and pump hundreds of billions of euros into defence.

Germany’s 10-year government bond yields DE10YT=RR were up 2.5 basis points at 2.90%. They jumped by 44.7 bps last week in their biggest rise since February 1990, hitting 2.929% - their highest level since October 2023.

Traders priced in a depo rate of 2.03% in December EURESTECBM6X7=ICAP from 1.92% last week before the announcement of Germany's fiscal plans. They also discounted an around 50% chance of a 25-bps rate cut in April.

Germany's 2-year yield DE2YT=RR, more sensitive to European Central Bank policy rates, was flat at 2.20%.

The yield gap between Italian and German bonds DE10IT10=RR - a market gauge of the risk premium investors demand to hold Italian debt - was at 103 bps after dropping below 100 bps for the first time since 2021 last week.

The spread between French and German bonds DE10FR10=RR stood at 67.5 bps, at the lower end of its recent range.