The Fed said most of the largest US banks passed their annual stress test, in a conservative report that underscored the recovery of the financial sector but called out a few laggards.

Bunds extended the previous day's losses as equities surged after the Fed said following its regular policy meeting that it expected "moderate" growth over coming quarters along with a gradual decline in the unemployment rate.

"They were modestly more upbeat on the economy...Banks passing the stress tests generally is helping risk-on and gave the next push down in Bunds," a trader said.

The June Bund future fell by as much as 80 ticks in early trade to 137.43, its lowest since March 1. It was last 62 ticks down on the day at 137.61.

Peripheral euro zone government bonds were tipped to outperform German benchmarks on the pick-up in demand for riskier assets although Italian debt could come under some pressure as traders push for cheaper prices ahead of up to 6 billion euros of supply.

Italy aims to sell up to 5 billion euros of a new three-year BTP bond as well as a 2019 bond in an auction which is expected to meet solid demand from investors flush with cheap European Central Bank funds.