Pressure also came from Treasury yields which fell following worse-than-expected U.S. job data while dovish Federal Reserve minutes released on Wednesday showed the central bank was in no rush to raise interest rates.

In late afternoon trading, safe-haven euro zone bond yields ticked lower, with Germany's 10-year yield, the benchmark for the bloc, losing around 1.2 basis point at -0.33pc.

Italian 10-year bond yields were down 3 basis points at 0.67pc, keeping the closely watched risk premium with Bunds at about 100 basis points but below the four-week high it touched on Wednesday.

Minutes of the ECB's March meeting published on Thursday showed policymakers debated a smaller increase in bond purchases and agreed to front-load the buying this quarter on condition it could be cut later if conditions allowed.

Monthly bond buys under the ECB's 1.85 trillion-euro Pandemic Emergency Purchase Programme (PEPP) jumped by over a fifth last month, enough to stabilize nominal bond yields and push inflation-adjusted yields back to their early-year lows.

The central bank ramped up buying of sovereign bonds after a surge in U.S. Treasury yields lifted borrowing costs in the bloc and threatened Europe's tentative recovery.

Sources told Reuters at the time that hawkish policymakers were sceptical about increasing the purchases and some saw rising nominal bond yields as a potentially welcome sign of economic recovery.

Repeating the bank's overall standing guidance, ECB President Christine Lagarde said on Thursday that the 1.85 trillion euros set aside may not have to be spent in full but could also be increased depending on market conditions.

Lagarde also said that while the resurgent pandemic would weigh on euro zone growth over the coming months, the recovery was expected to pick up once lockdowns are lifted.

Lagarde's comments came as data showed euro zone producer prices rose at an accelerated year-on-year pace in February as the cost of energy and intermediate goods went up, underlining expectations of faster consumer price growth in the coming months.

Euro zone consumer inflation jumped in March to 1.3pc, taking another step higher in what is likely to be a temporary but sharp climb that may put consumer price growth above the European Central Bank's target of near 2pc later this year.

The ECB has predicted the surge, warning that inflation may even exceed its target by the close of the year, but has promised to look past what it expects to be a temporary increase in its policy decisions.

Worries about the rollout of COVID-19 vaccines and its consequence for the European economy have risen after European regulators found a potential link between AstraZeneca's vaccine and reports of rare brain blood clots.

The setback for the vaccine, a key component of the bloc's inoculation efforts, comes as the euro area grapples with a new wave of the virus. Spanish regions tightened lockdowns on Wednesday and Germany's chancellor supported a tougher lockdown.

Italy started the process of selling new 50-year and 7-year bonds via a syndicate of banks on Wednesday, having flagged the new issues the previous day.

Portugal raised, via a syndicate of banks, 4 billion euros from a 10-year bond on the back of 30 billion euros of demand, according to a lead manager memo.

The tone across euro zone debt markets was largely subdued, with most 10-year bond yields down 1-2 basis points (bps) on the day following an overnight fall in U.S. Treasury yields.

"Overall, the pull higher from U.S. rates is alive and well and the rebound in euro zone bond markets is largely technical and temporary in nature," said senior ING rates strategist Antoine Bouvet.

Germany's 10-year Bund yield was flat at -0.32pc, down from recent highs around -0.26pc.

IHS Markit's euro zone Services Purchasing Managers' Index (PMI) rose to 49.6 in March from February's 45.7, higher than a flash estimate of 48.8 and only just shy of the 50 mark that separates growth from contraction.

The euro zone economy is on course for a robust recovery in the second half of the year that could allow the European Central Bank to start phasing out its emergency bond purchases in the third quarter, Dutch central bank chief Klaas Knot said.

The ECB bought a net 6.178 billion euros ($5.20 billion) of assets last week as part of its quantitative easing programme, below the 23.995 billion euros it purchased a week earlier.

Italy's 10-year bond yield was unchanged at 0.70pc, having risen sharply on Tuesday as investors braced for new supply. The gap over German Bund yields held just above 100 bps.

Analysts said bond spreads were moving back into focus, especially after a decision by the German constitutional court last month to stop the ratification of the European Union's Recovery Fund prompted investors to price some risk back into peripheral bonds.

"The Tesoro's (Italian Treasury's) announcement of a new syndicated 50-year BTP caught markets off guard, with 10-year and 30-year (yield) spreads versus Bunds widening up to 7 bps to the highest level in almost a month," said Michael Leister, head of interest rate strategy at Commerzbank, referring to Tuesday's market moves.

"While thinner Easter liquidity might also play a role, these moves add weight to our tactical shorts in Italy versus semi-core (bonds) and Spain as supply indigestion risk is being compounded by doubts regarding the NGEU (Next Generation EU), the ECB's resolve and less generous carry differentials."

Last week's data showed the U.S. economy created the most jobs in seven months in March, beating expectations, as more Americans got vaccinated and the government doled out additional pandemic relief money.

That pushed safe-haven U.S. Treasury yields higher across the curve on Friday, although they gave up some of those gains on Monday with the downward trend continuing on Tuesday.

On Tuesday, the first day of trading in the euro zone after the Easter holiday, Germany's 10-year yield, the benchmark for the bloc, rose as much as 3 basis points (bps) before paring some gains.

By 1525 GMT it was up nearly 1 bps at -0.317pc.

"Thanks to yesterday's decline in U.S. Treasury yields, any upward pressure on Bund yields stemming from spillover effects is likely to be limited," UniCredit analysts told clients.

Lower-rated Southern European bonds underperformed higher-rated peers, with yields rising 3 to 7 basis points. Bond yields move inversely with prices.

European bond traders closely follow developments in U.S. Treasuries, as bonds in the two regions trade in close correlation.

That caused worries in February, when a sharp rise in Treasury yields on expectations that a vast U.S. stimulus package would reignite growth and inflation also sent euro area borrowing costs higher.

The move was seen as less justified given the bloc's weaker economic outlook coming out of the pandemic.

Euro area data on Tuesday supported sentiment on economic recovery, with an investor morale index rising in April to its highest since August 2018, as investors base their expectations on accelerated vaccination programmes across the European Union.

Unemployment in the bloc was unchanged in February compared to an upwardly revised January reading, as European furlough schemes limited the impact of the second wave of the pandemic on jobs.

The focus this week will be on the European Central Bank, which is expected to release monthly data on its conventional asset purchases and the bi-monthly breakdown of its pandemic emergency bond purchases on Wednesday, followed by the minutes for its March meeting on Thursday.

In the primary market, Italy and Portugal hired syndicates of banks for bond sales that are expected in the "near future", a phrase debt management offices usually use a day before a sale.

Italy will sell a new 50-year bond and re-open a seven-year bond, its Treasury said, while Portugal will sell a 10-year bond, according to a memo seen by Reuters.

Italian 10-year bond yields rose almost 7 bps to 0.700pc, while 10-year Portugues yields were up 3 bps to 0.247pc.

Outstanding bond yields tend to rise ahead of a new sale as investors prepare for the new supply.

German and Italian yields rose on Tuesday to their highest in nearly two weeks, driven by a sell-off in U.S. Treasuries as U.S. vaccinations against COVID-19 picked up and expectations grew that trillions of dollars of infrastructure spending could further lift economic growth and debt issuance.

On Wednesday, Germany's 10-year yield, the benchmark for the euro zone, was down 2 basis points at -0.29%. Italian 10-year yields were down almost 3 basis points to 0.66%.

Euro zone inflation jumped in March, an initial estimate showed on Wednesday, taking another step higher in what is likely to be a temporary but sharp climb that may put price growth above the ECB's target near 2% later this year.

Inflation accelerated to 1.3% from 0.9% a month earlier, in line with expectations by a Reuters poll.

Inflation excluding food and energy prices, a less volatile measure that the ECB watches more closely, slowed to 1%.

The data did not move the bond market as it followed national readings showing German inflation at 2% on Tuesday.

"With wages weak, fiscal stimulus set to fade and growth expectations slower than in the U.S., overheating in the euro zone is really not an issue for the moment," ING senior economist Bert Colijn said.

He noted that rising inflation will likely prove temporary, due to increasing energy costs, the expiry of a German value-added tax cut and changes to the way inflation is measured.

But the European Central Bank will likely face a bigger communication challenge once European economies reopen during the summer and inflation rises further, Colijn added.

"For an ECB that has been struggling with providing clarity on the strategy regarding rising yields, this will become a hot summer."

ECB President Christine Lagarde defied investors who have been pushing up borrowing costs, saying in a Bloomberg TV interview on Wednesday that "they can test us as much as they want".

On the last day of March trading, German 10-year yields were set to end the month 2 basis points lower, outperforming U.S. Treasuries, which have risen nearly 30 bps this month. Bond yields move inversely with prices.

Germany's 10-year yield is still set for its biggest quarterly rise since the fourth quarter of 2019, up 30 bps since the start of the year after a sell-off in February. That was driven by rising Treasury yields and expectations the U.S. stimulus package would bring back inflation and growth.

In the United States, the focus is on President Joe Biden as he prepares to outline the first part of some $3 trillion to $4 trillion of infrastructure spending proposals expected over the next 10 years.

U.S. private employment data showed in March its largest increase since September.

Core euro zone bond yields have fallen in recent weeks as a resurgence in cases of COVID-19 and new lockdowns in Germany, France and elsewhere, rattle investor confidence in the region's economic recovery.

German Chancellor Angela Merkel over the weekend pressured states to step up their pandemic response to try to stem the rise in cases.

But German yields rose on Friday and continued to climb on Monday. The 10-year yield rose 4 basis point to a six-day high of minus 0.32pc.

Last week, the yield fell almost 6 basis points, its biggest drop since December.

Analysts said that a German constitutional court decision on Friday may be pushing yields slightly higher too.

The court said that Germany's president may not sign off on legislation ratifying the European Union's Recover by Fund as long as it was looking into an emergency appeal against the debt-financed investment plan.

German opponents of the EU's fund to aid recovery from the pandemic argue that it violates European treaties by opening the door to joint borrowing by member states.

Berenberg's economist, Holger Schmieding, said that it was hard to comprehend the legal intricacies of the case but even if German ratification was further postponed it was unlikely to cause a significant selloff in euro zone government debt.

"A further delay in payouts from the 750 billion-euro fund well beyond mid-2021 would be unfortunate. But it need not be a major problem even for fiscally challenged countries such as Italy," Schmieding said.

"As long as markets expect that the money would flow a little later, countries could likely continue to borrow at rates that are very low by historic standards."

INFLATION DATA

Bond investors are preparing for euro zone and U.S consumer confidence data due on Tuesday, as well as preliminary euro zone inflation numbers.

German bond yields have fallen in March while U.S. Treasuries have risen after fears of a spike in U.S. inflation sparked a significant selloff.

With the European Central Bank increasing the pace of its asset purchases and Europe's slow vaccination rollout, euro zone bonds have outperformed. But some analysts reckon the trend could start to unwind.

Mizuho analysts note that the consensus for the German inflation reading is 2pc year-on-year.

"While the euro zone aggregate is expected to remain at 1.1pc, these sorts of German numbers should assist the market in pricing a narrative that inflation is building in Europe," they said, forecasting that Bunds would "underperform UST (U.S. Treasuries) going forward".

Other core euro zone bond yields were higher by 2-3 basis points as were peripheral yields.

This week sees end-of-quarter investor rebalancing of portfolios before liquidity drops during the Easter holidays.