Euro zone yields steady as traders assess Iran war developments, UK politics

LONDON, May ⁠8 (Reuters) - Euro zone government bonds steadied on Friday ​as 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 were unchanged at 3.009%. Two-year Schatz yields rose 2 bps to 2.5916% , a second day of ⁠gains after their biggest daily fall in a month on ⁠Wednesday.

Brent oil prices - a key driver of ​broader financial markets since the war started in late February - rose 0.2% to $100.09 a barrel, paring earlier gains that were already a modest swing compared with the volatility earlier this week.

Investors are awaiting U.S. nonfarm payrolls ​due later ‌in the session for a read on the U.S. economy, with a slowdown anticipated by economists surveyed by Reuters.

UK gilts were in focus after British Prime Minister Keir Starmer's Labour Party suffered heavy early losses in local elections.

Despite concerns of political upheaval, UK gilts were outperforming major peers, with the 10-year yield down 5 bps ​to 4.893%.

"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 7.3 bps to 5.56% .

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 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 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 unchanged at 3.749% . (Reporting by Lucy Raitano. Editing by Toby Chopra and Mark Potter)