Traders ramped up their bets on European Central Bank rate hikes, driving a bearish flattening of the German government bond yield curve.

Italian government bonds edged higher and outperformed other euro-area debt after Italy's parliament approved Prime Minister Meloni's electoral system reform plan. The spread between Italian and German government bond yields narrowed by 4 basis points to 111 basis points, having earlier widened to as much as 120 basis points.

The rally in Italian government bonds also lent support to French government bonds, with the spread between French and German government bond yields holding steady at 139 basis points after earlier widening to as much as 144 basis points.

Traders raised their bets on European Central Bank rate hikes by as much as 7 basis points. Swap markets are now pricing in 23 basis points of tightening by year-end and 74 basis points by the end of 2027.

The UK government bond yield curve also saw a bearish flattening, with money markets raising their bets on Bank of England rate hikes by as much as 7 basis points. Markets now price in 23 basis points of tightening in November and 37 basis points by December.

Market levels: The 10-year German government bond yield rose 2 basis points to 3.49%. German government bond futures fell 12 ticks to 120.69. The 10-year Italian government bond yield fell 2 basis points to 4.60%. The 10-year French government bond yield rose 2 basis points to 4.89%. The 10-year UK government bond yield rose 4 basis points to 5.48%.