Euro zone bond yields rise on U.S.-Russia talks and hawkish ECB comments

Updates after comments from ECB's Schnabel

By Harry Robertson

LONDON, Feb 19 (Reuters) - Euro zone bond yields rose to their highest in more than two weeks on Wednesday as investors focused on potential extra borrowing amid U.S.-Russia talks on Ukraine and comments from a European Central Bank official floating a pause to rate cuts.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 6 basis points (bps) to 2.546%, the highest since Jan. 30. Yields rise as prices fall and vice versa.

Benchmark German yields have risen around 12 bps this week after U.S. President Donald Trump shocked allies by initiating talks with Russia over ending the Ukraine war, and figures in his administration said Europe will have to shoulder more of the security burden.

That implies higher spending on defence and so higher borrowing via bond markets, adding to upward pressure on yields.

"All of a sudden not only politicians but also markets seem to be waking up to the reality that there will be substantially more defence spending, and that will have to be financed somehow," said Jussi Hiljanen, head of European rates strategy at SEB.

Investors were also digesting the latest tariff threats from Trump, who said he intends to put a roughly 25% levy on cars. Elsewhere, UK inflation came in higher than expected, rising to 3% in January from 2.5% in December.

ECB JOLT

Yields were pushed higher by ECB Governing Council member Isabel Schnabel, who told the Financial Times in an interview published on Wednesday that the central bank should start a discussion about whether further rate cuts are necessary.

"We are getting closer to the point where we may have to pause or halt our rate cuts," she said.

Germany's two-year bond yield DE2YT=RR, which is sensitive to ECB rate bets, rose and was last up 5 bps at 2.178%.

Traders in money market knocked about 4 bps off their bets on further rate reductions and were last predicting around 72 bps of cuts by the end of December.

Italy's 10-year yield IT10YT=RR was last up 9 bps at 3.594%, set for its biggest one-day rise since mid-December. Countries such as Italy with higher debt levels tend to benefit the most from reductions in borrowing costs.

The spread between French and German 10-year bond yields widened by around 2 bps after ending at 66 bps on Tuesday, the lowest closing price since July DE10FR10=RR. The eventual passing of a budget earlier this month has cooled concerns among investors about the French economy.