German government bonds posted their largest advance in over a week after US July Producer Price Index (PPI) data came in below expectations, with medium-term maturities leading the rally. The gains narrowed toward the close of trading as Brent crude oil recovered some of its earlier losses.

Money markets reduced their bets on European Central Bank interest rate hikes by up to 4 basis points. They now expect the ECB to raise rates by 22 basis points next month and by 38 basis points by the end of the year.

UK government bonds edged higher, but their advance was constrained by the rebound in oil prices. Swap markets indicate investors anticipate a 26-basis-point rate hike from the Bank of England this year, down from the 28 basis points projected on Wednesday.

Market Snapshot:

German 10-year bond yields fell 3 basis points to 3.13%.

German bond futures rose 32 ticks to 125.06.

Italian 10-year bond yields dropped 4 basis points to 3.90%.

The Italy-Germany bond yield spread narrowed 2 basis points to 77 basis points.

French 10-year bond yields declined 3 basis points to 3.95%.

UK 10-year gilt yields fell 2 basis points to 4.95%.