European bonds extended their rally as oil prices fell for the third consecutive trading day, with short-term bonds leading the advance. The decline in energy prices eased concerns about inflation risks.

The yield on Germany's two-year government bond fell 4 basis points to 2.75%, its lowest level in nearly two weeks. Short-term bond yields declined more than their long-term counterparts, pushing the yield curve into a bull steepening pattern. Traders are now pricing in a total of 53 basis points of rate hikes by the European Central Bank over the next year, down from the approximately 70 basis points expected less than a week ago.

UK gilts also moved higher, with the two-year yield falling 5 basis points to 4.33%.

Market snapshot: German 10-year bund yields fell 2 basis points to 3.11%; German bond futures rose 6 points to 125.03; Italian 10-year bond yields dropped 4 basis points to 3.91%; the Italy-Germany bond yield spread was little changed at 80 basis points; French 10-year bond yields declined 4 basis points to 3.89%; and 10-year UK gilt yields fell 4 basis points to 4.96%.