Signs that major central banks will keep monetary policies loose pushed euro zone government bonds higher on Tuesday even as fresh data pointed to strong growth in Germany.
European Central Bank President Mario Draghi said on Monday the bank was ready to offer another round of cheap loans to banks to anchor money market rates.
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Coming on the back of the U.S. Federal Reserve's surprise decision last week to maintain the pace of its massive bond-buying programme, market participants see bond yields staying low for an extended period.
Draghi's message was reinforced by ECB Governing Council member Ewald Nowotny on Tuesday who said it was too early for the ECB to exit its crisis measures and that unconventional policy remains important.
German business morale came in below expectations but it improved slightly to its highest level in 17 months in September, suggesting Europe's largest economy is staging a firm recovery.
"We had Draghi yesterday suggesting the door is still open for a further LTRO and we are really seeing follow-through from yesterday's price action," ICAP strategist Philip Tyson said.
"(The Ifo) was marginally weaker (than expected), which has meant that the rally that we saw yesterday ... can continue."
German Bund futures jumped 45 ticks to 139.23, pushing 10-year government bond yields 3.6 basis points lower to 1.83 percent.
Euro zone bonds rose across the credit spectrum. Ten-year Italian yields eased 4 bps to 4.23 percent and the Spanish equivalent fell 3 bps to 4.25 percent. French 10-year borrowing costs fell 3.2 bps to 2.40 percent.
Some analysts have said central banks are keeping policy loose so as not to threaten a still fragile global economic rebound.
One influential Fed policymaker said on Monday it must for now continue to push hard against threats to the U.S. recovery, but should still be able to reduce its support for the economy later this year.
ING senior rates strategist Alessandro Giansanti said the central bank comments had focused investor attention on valuations.
"In the euro zone and in the U.S. you have 10-year yields that were trading almost in line with the fair value so that's why there was less pressure for having higher yields and then with the dovish central bank statement, it triggered a rally in core bonds," he said.
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