German government bonds pared earlier declines following a rally in US Treasuries, which was spurred by US inflation data that tempered expectations for global interest rate hikes.
The rebound was led by shorter-dated maturities, with the 2-year yield dropping as much as 3 basis points to 2.73%, reversing an earlier increase of 2 basis points.
Yields on longer-dated bonds were largely flat on the day, resulting in a slight steepening of the yield curve as various maturities moved in different directions.
Traders are now pricing in a cumulative 40 basis points of tightening by the European Central Bank by year-end, down from bets as high as 49 basis points on Monday.
Longer-dated UK gilt yields extended their decline into the close, following reports that the likely incoming Prime Minister, Andy Burnham, is set to appoint Shabana Mahmood as the UK Chancellor of the Exchequer.
Mahmood currently serves as the Home Secretary. Simon Harvey, a senior macroeconomist at LB Macro, noted she is "seen as a more pragmatic choice" compared to Energy Secretary Ed Miliband. He stated that this news, combined with falling US Treasury yields and a drop in oil prices, contributed to renewed buying interest in longer-dated UK government bonds.
Market Snapshot:
The yield on the German 10-year Bund was essentially unchanged at 3.11%.
The German Bund futures contract fell 11 ticks to 125.13%.
The yield on the Italian 10-year government bond rose 1 basis point to 3.89%.
The spread between Italian and German government bond yields widened by 1 basis point to 78 basis points.
The yield on the French 10-year government bond increased by 1 basis point to 3.90%.
The yield on the 10-year UK gilt fell 5 basis points to 4.93%.
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