Euro zone government bond yields edged higher but stayed significantly below their multi-year highs as concerns about systemic risk and economic slowdown drove investors to lower bets on terminal rates.
Lingering hopes of a less aggressive monetary policy stance are likely to fade if inflation keeps surprising on the upside and the economy shows some strength.
Meanwhile, a sharp rate rise from New Zealand's central bank is a reminder that major central banks remain in monetary tightening mode.
Germany's 10-year yield, the benchmark of the bloc, rose 3 basis points (bps) to 1.92%. It reached its highest since end-November 2011 on Tuesday last week at 2.35%.
"The bond rally will need another relay of 'good', understand 'bad' from the point of view of the economy, news to keep its momentum going," ING analysts said.
Investors will focus on PMI data later in the session. Activity in Spain's services sector contracted in September for the first time since January.
The European Central Bank must at the very least stop stimulating the economy through its monetary policy, the ECB's President Christine Lagarde said on Tuesday, in a likely reference to raising interest rates back to "neutral" territory.
Neutral is a level of interest rate that neither stimulates nor curbs economic growth, all else being equal.
"While central banks are reiterating the importance of data dependency, one still has the impression that realised inflation is key, and with current levels of 10%, it is hard to believe European government bonds will continue their bull run over the next few days," UniCredit analysts said.
They also recalled that market-based inflation expectations have fallen substantially.
A market gauge of long-term inflation expectations was at 2.13% on Tuesday, close to its lowest since end-July hit on Monday at 2.06%.
Bond yields in the euro area declined from their multi-year highs last week while euro zone inflation data hit 10.0% in September, a new record high.
Italy's 10-year government bond yield rose 5 bps to 4.24% on Wednesday, with the spread between Italian and German 10-year yields at 230 bps.
Analysts flagged that subsiding quantitative tightening risks and talk about more European Union joint issuance should support spreads.
Two top EU officials on Tuesday called for joint borrowing to help the 27-nation bloc navigate the energy crunch, which would support heavily-indebted countries.
Some analysts quoted media sources saying the ECB governing council will begin discussions on shrinking its balance sheet during Wednesday's non-monetary policy meeting.
(Reporting by Stefano Rebaudo, editing by Barbara Lewis)