Euro zone bond yields surge as Germany agrees historic spending overhaul

By Harry Robertson

LONDON, March 14 (Reuters) - Euro zone bond yields rose sharply on Friday after Germany's chancellor-in-waiting Friedrich Merz thrashed out a deal with the Green and Social Democrat parties to overhaul the country's debt rules and massively boost state spending.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose to 2.932%, coming within a whisker of the 17-month high of 2.938% touched earlier this week. It was last up 6 basis points at 2.911%.

Merz reached an agreement with the Greens on Friday ahead of a parliamentary vote on reforming the borrowing rules next week, a source close to the negotiations told Reuters. A debt deal compromise is now being examined by finance ministry officials, parliamentary sources said.

Yields soared earlier this month as investors learnt of the plans, which would mean much more borrowing via bond markets.

Germany's 30-year bond yield DE30YT=RR on Friday surged to its highest since October 2023 at 3.247% and was within touching distance of its highest since 2011. Yields move inversely to prices.

RBC Capital Markets analysts said on Thursday they expect the 10-year German bond yield to finish the year at 3.25%.

"(We) think the combination of a boost to the economy and larger funding needs argued for higher yields as the year progresses," the analysts said in a note.

Other euro zone yields also rose, with Italy's 10-year yield IT10YT=RR hitting its highest since July at 3.992%, up around 5 bps.

The spread between U.S. 10-year Treasuries and German Bund yields DE10US10=RR fell to 138 bps. It dropped to around 130 bps earlier this week, its lowest since July 2023.

U.S. bond yields have fallen due to concerns about the impact of President Donald Trump's tariffs on the economy.

Investors were also waiting for a French credit rating decision by agency Fitch, which is due after markets close.

In October Fitch revised France's outlook to "negative" from "stable" on Friday, citing increases in fiscal borrowing and political risks.

A budget has since been passed in France but spending needs remain elevated as the United States insists Europe takes on more of the security burden.

French 10-year bond yield FR10YT=RR was in line with other markets on Friday, up around 5 bps at 3.602%.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was up 3 bps at 2.212%.