LONDON: Lower-rated euro zone bonds consolidated gains on Tuesday after ECB policymakers hinted again at monetary easing and as fears receded that a strong Eurosceptic vote in EU elections might destabilise fragile governments.
While the pace of Monday's post-election rally eased, demand for riskier assets was bolstered by firm hints that the ECB is preparing measures to spur the euro zone economy for its monthly policy meeting next week.
"Certainly something is going to happen (at the ECB meeting), it is now a question of how much and how fast," Societe Generale strategist Ciaran O'Hagan said.
ECB policymaker Ewald Nowotny said the bank was discussing cutting rates at its June 5 meeting, as it seeks to keep the bloc's economic recovery from petering out.
Draghi, who is due to speak later at an ECB forum in Portugal, said on Monday that the bank must be "particularly watchful" of any negative price spiral and that "more pre-emptive action may be warranted".
Italian 10-year bond yields dipped 2 basis points to hit 2.98 percent, making further headway after their biggest one-day drop in seven months on Monday.
Prime Minister Matteo Renzi's centre-left Democratic Party held off a challenge from the anti-establishment 5-Star Movement to triumph in European parliamentary elections, strengthening his mandate to push for economic reforms.
Italy comfortably sold 3 billion euros of zero-coupon bonds on Tuesday, the top planned amount, as well as 1 billion euros of inflation-linked bonds. It is due to auction further 7.5 billion euros of long-term debt on Thursday.
Greek 10-year yields dropped 1 bp to 6.23 percent after victory for the anti-austerity Syriza party in this weekend's EU poll failed to deliver the knockout blow to Prime Minister Antonis Samaras's government some had feared.
Ireland and Portugal - both of which, like Greece, had to be bailed-out at the depths of the crisis - saw their 10-year yields drop 2 bps and 5 bps, respectively, to 2.69 and 3.67 percent. Spain's were 2 bps lower at 2.88 percent.
Strategists said a decisive Ukrainian presidential election which should also help reduce tensions with its Russian neighbours, was also helping to support risk appetite.
Russian president Vladimir Putin has called for a peaceful dialogue between Kiev and regional leaders as fighting rages in the east of the country.
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