European government bonds have seen modest gains as a decline in oil prices alleviated market concerns over inflation risks, leading traders to scale back their bets on further interest rate hikes from the European Central Bank this year.
Yields on German government bonds fell across the board by approximately 1 basis point; the two-year German bond yield dropped to 2.66%, driven by market optimism regarding a potential peace agreement between the US and Iran, which pushed oil prices down nearly 3%.
UK government bonds outperformed their German counterparts, with the two-year UK gilt yield falling 4 basis points to 4.33%. Short-dated yields experienced more significant declines, resulting in a bull-steepening of the yield curve.
Traders are now pricing in roughly 66 basis points of interest rate increases from the European Central Bank for the remainder of the year, down from the 69 basis points anticipated the previous day. The market has already fully priced in an ECB rate hike for next week.
Market expectations for Bank of England rate hikes this year have also moderated, with around 46 basis points now expected, compared to 52 basis points forecast on Wednesday.
Investors are awaiting speeches scheduled for Friday from Bank of England Governor Andrew Bailey and policymaker Swati Dhingra.
Market Snapshot
The yield on the German 10-year Bund fell 1 basis point to 3.03%.
German Bund futures rose 4 ticks to 125.63.
The yield on the Italian 10-year government bond was largely unchanged at 3.77%.
The Italy-Germany 10-year yield spread widened by 1 basis point to 75 basis points.
The yield on the French 10-year government bond was also little changed at 3.67%.
The yield on the UK 10-year gilt declined by 3 basis points to 4.90%.
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