European government bonds advanced as energy prices retreated after two days of significant gains, boosting market risk sentiment. The German yield curve steepened, while Italian sovereign bonds outperformed their peers. Italy's stock market rose 2%.

Money markets scaled back bets on European Central Bank interest rate hikes, now pricing in just 4 basis points of tightening this year, down from as much as 17 basis points on Tuesday.

The yield spread between Italian and German 10-year government bonds narrowed by 3 basis points—the largest single-day decline in two months—to 68 basis points. Earlier in the session, it had widened to 74 basis points, the highest level since November.

The German 2s10s yield curve steepened by 1.5 basis points to 61 basis points, ending its longest flattening trend since 2019.

UK government bonds also rose, although longer-dated issues underperformed. Traders increased bets on Bank of England rate cuts, now expecting 33 basis points of easing this year, up from 28 basis points previously.

Market data: - Germany's 10-year bond yield increased by 1 basis point to 2.75%; - German bond futures rose 19 ticks to 129.12; - Italy's 10-year bond yield fell 3 basis points to 3.42%; - France's 10-year bond yield declined 3 basis points to 3.34%; - The UK 10-year gilt yield dropped 3 basis points to 4.44%.