(Updates with details)

By Yadarisa Shabong

March 18 (Reuters) - Euro zone government bond yields

rose on Tuesday as investors awaited a German parliamentary vote

on fiscal reforms that could propel Europe's largest economy and

spur growth across the region.

Germany's lower house of parliament will vote later in the

day on the proposals of conservative election winner Friedrich

Merz to ease constitutional debt rules - known as the debt brake

- and set up a 500-billion-euro infrastructure fund.

The German 10-year bond yield rose 4 basis

points to 2.845%. The benchmark for the euro zone rallied to its

highest since October 2023 last week after a big jump in early

March, when the plans were first announced.

Peter Schaffrik, global macro strategist at RBC Capital

Markets said the German reforms are now priced in the bund

yields.

"The bigger question, but that will not be answered in the

short run, is how much of the money that has been agreed to

spend can be spent and at which time," Schaffrik said.

Should the legislation pass the Bundestag lower house of

parliament, it still has to go to the Bundesrat upper house.

German 10-year yields could rise to 4%, their highest since

2008, in the next three years, French bank BNP Paribas said on

Tuesday, as the country issues far more bonds to fund the extra

spending.

Italy's 10-year bond yield was higher by 4 basis

points at 3.892%, and the gap between the Italian and German

10-year bond yields was 104 bps.

The closely watched spread between German and Italian yields

has been largely unaffected by recent ructions in markets, with

Italian yields broadly rising in line with the German.

"The market is not necessarily seeing this as a major spread

move, let's say Germany versus the rest, but as a real economic

boost lifting both boats so to speak," Schaffrik said.

The spread between the German and French 10-year bond yields

was at 67 basis points, which has narrowed from

the 84 basis points gap seen on March 5, with French fiscal woes

well down investors' list of concerns.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, was up 2

basis points at 2.2%.

German investor morale improved more than expected in March,

the ZEW economic research institute said on Tuesday.

Markets are also watching closely the talks between U.S.

President Donald Trump and Russian President Vladimir Putin on

Tuesday, amid Trump's attempt to convince his counterpart to

accept a ceasefire in Russia's war with Ukraine.

The days ahead are packed with major central bank decisions,

including by the Federal Reserve on Wednesday and the Bank of

England on Thursday.

Tariffs too remain a focus and markets are bracing for a

potential ramp up in the global trade war.

Trump has promised levies on autos beginning April 2, and

plans to implement a broader policy of reciprocal tariffs, where

the U.S. would match all levies on U.S. goods imposed by other

countries after tit-for-tat moves by the European Union, China

and Canada.

Whether or not those reciprocal tariffs will be introduced

and if so, to what degree, will be important for markets,

Schaffrik said.