Jan Smets, the ECB governing council member from Belgium told Reuters in an interview that euro zone inflation could take longer to rise than anticipated and that the ECB should not accept below-target price growth. He added that the ECB had not even started a discussion about revising its monetary policy framework or even its so-called forward guidance.
Smets echoed ECB executive board member Benoit Coeure who said short-term interest rates would stay at "very low levels", underpinning sentiment just days after the ECB gave up a pledge to increase bond purchases if needed but signalled a slow route out of its stimulus.
While investors bet that a rate rise from the ECB remained some way off, firm U.S. jobs data on Friday reinforced expectations the Federal Reserve will lift rates this month and diverging rate views pushed out the gap between U.S. and German bond yields once more.
The U.S./German 2-year yield spread was at 289 basis points,
UNCERTAINTY IN ITALY
German short-dated bond yields
Portuguese and Spanish bond yields outperformed, dropping 3-4 bps
Italy, the Netherlands, Germany, Portugal, France and Spain are expected to auction up to 30 billion euros ($37 billion) in bonds between them.
The increase in supply, along with uncertainty over the make-up of the next Italian government after an inconclusive March 4 election, could pressure Italian bonds.
Italy's 10-year bond yield inched up 2 bps in late trades
"It is an open race as to who will form the next Italian government and this uncertainty is starting to weigh on spreads," said DZ Bank rates strategist Daniel Lenz.
The defeated centre-left Democratic Party (PD) could give a majority to either the conservative bloc or the anti-establishment 5-Star. Outgoing leader Matteo Renzi has said that his party will head into opposition and ruled out any alliance.
The PD meets on Monday to start plotting a new course after their election rout.
"Markets will be watching how the PD splits between backing Renzi or helping other parties in forming a government," said ING senior strategist Martin Van Vliet.
($1 = 0.8108 euros)
(Reporting by Dhara Ranasinghe and Fanny Potkin; Editing by Mark Heinrich, Susan Fenton and Dasha Afanasieva)
By Dhara Ranasinghe and Fanny Potkin