Euro zone yields edge higher as oil rises on Iran war concerns; UK gilts lag

LONDON, May 8 (Reuters) - Euro zone government bonds eased on ​Friday as ⁠investor wariness over renewed clashes between the ​U.S. and Iran sent oil prices higher, although moves were muted compared to volatile sessions earlier this week.

Benchmark ​10-year ‌German bund yields rose 2 basis points to 3.0187% in early trade.

Two-year Schatz yields rose 3 bps ⁠to 2.6024%, a second day of rises having staged their ⁠biggest daily fall in a month on ​Wednesday. Brent oil prices - a main driver for broader financial markets since the war started in late February - rose 0.6% to $100.62 a barrel on Friday, also a modest swing compared to more volatile ​sessions ‌earlier this week. UK gilts were in focus after British Prime Minister Keir Starmer's Labour Party suffered heavy early losses in local elections on Friday.

But UK 10-year gilts were largely unchanged at 4.948%, underperforming other major European rates.

"The bad result for Labour, I think, is priced in," ​said Kallum Pickering, chief economist and deputy head of research at Peel Hunt.

Bond investors meanwhile 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 is 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 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. (Reporting by Lucy Raitano; Editing by Toby Chopra)