European government bonds extended their gains on Monday, pushing yields across several maturities to their lowest levels in over a week, as a sharp drop in Brent crude prices weighed on inflation expectations. Brent oil fell more than 3% to below $90 per barrel, providing a boost to fixed-income assets and prompting traders to scale back their bets on further monetary policy tightening.

Italian and French debt outperformed, with the belly of the curve leading the move lower. Yields on five-year notes from both countries each declined by 8 basis points, settling at 3.39% and 3.45% respectively, their lowest levels since August 17. The softer tone in energy markets fueled expectations that inflation pressures may ease, leading traders to trim their forecasts for European Central Bank rate hikes. They now price in roughly 41 basis points of cumulative tightening by the end of the year, down from the 44 basis points reflected earlier in the session.

Across the Channel, UK gilts also saw yields fall by about 7 basis points across the curve. The two-year yield dropped to 4.31%, while the five-year yield slipped to 4.52%, both marking their lowest levels since August 14. Similarly, traders reduced their expectations for Bank of England rate increases, now anticipating around 25 basis points of cumulative hikes by year-end, compared with 30 basis points at the start of the day.

In other market moves, German 10-year bund yields fell 5 basis points to 3.20%, while bund futures climbed 45 ticks to 124.42. Italy's 10-year yield dropped 7 basis points to 4.00%, narrowing the spread over German bunds by 2 basis points to 80 basis points. France's 10-year yield declined 7 basis points to 4.05%, and the UK's 10-year yield also fell 7 basis points to 4.99%.