Euro zone short-dated bond yields inch up as traders assess Iran war, UK politics

LONDON, May 8 (Reuters) - Short-dated euro zone government bond ​yields edged ⁠up on Friday as renewed clashes between the ​U.S. and Iran kept oil prices around $100 a barrel, although moves were muted compared to volatile sessions earlier this week. Two-year German bond yields ​rose ‌1.8 basis points to 2.59% , a second day of gains after their biggest daily fall in a month on Wednesday. ⁠Benchmark 10-year German Bund yields were unchanged at 3%. Brent oil prices - ⁠a key driver of broader financial markets since ​the war started in late February - were last up 0.4% at $110.48 a barrel, having risen as much as 3%. The monthly U.S. employment report showed the world's largest economy created far more jobs than expected in both April and March, ​while wage ‌growth was relatively benign, which helped soothe some concern that the turmoil from the war and high energy prices were hurting underlying activity. UK gilts were in focus after British Prime Minister Keir Starmer's Labour Party suffered heavy early losses in local elections.

Gilts were outperforming major peers, with the 10-year yield down 5 bps at 4.893%, after Starmer ​vowed to stay in office to "deliver change".

"The bad result for Labour, I think, is priced in," said Kallum Pickering, chief ‌economist and deputy head of research at Peel Hunt. Longer-dated 30-year UK gilt yields fell 7 bps to 5.57% .

Bond investors remain focused on inflation risk amid higher energy ‌prices, though major central banks including the Federal Reserve, European Central Bank and Bank of England opted to keep interest rates on hold last week.

"I think markets are priced too much towards interest rate hikes and not enough ​towards central banks trying to hold through this and then cut in Q4," said Peel Hunt's Pickering.

"There's much too much muscle memory ‌from 2022 when the Russian invasion of Ukraine caused the gas price to go up," Pickering said, adding that the main risk was to output and employment. ECB Executive Board member Isabel Schnabel - one of the bank's top policymakers - warned on ⁠Thursday of ⁠the rising risk of higher inflation in the wake of the Iran ‌war and of the "quiet erosion" of central bank independence at a difficult moment of rising global debt.

Money markets show traders are attaching roughly a ​57% chance of no change ​in policy at the ECB's next meeting in June, reversing from last week ‌when the majority were betting on a hike. On Friday, German exports rose unexpectedly in March, but industrial output fell despite a forecast rise, official data showed. Italian 10-year bond yields were 2 bps lower at 3.729% . (Reporting by Lucy Raitano; Additional reporting by Amanda Cooper; Editing by Toby Chopra, Mark Potter and Emelia Sithole-Matarise)