Euro zone bond yields edge lower, eyes on German climate package

• Longer-dated euro zone government bond yields edged lower on Friday.
• The German economy started the third quarter on a weaker footing, the Finance Ministry said overnight, with signs emerging of a future rise in unemployment.
• Longer-dated yields were down 1 basis point across higher-rated euro zone government bonds.

LONDON: Longer-dated euro zone government bond yields edged lower on Friday as fresh tensions in the Middle East brought geopolitical risks back into focus and dragged share markets lower.

Iran warned U.S. President Donald Trump on Thursday against being dragged into all-out war in the Middle East following an attack on Saudi Arabian oil facilities which Washington and Riyadh blame on Tehran.

A Saudi-led coalition on Friday launched a military operation north of Yemen's port city of Hodeidah against what it described as "legitimate military targets", a move that could aggravate regional tensions after the weekend attack on Saudi Arabia.

Uncertainty also remains high on the trade and economic growth front. U.S. and Chinese deputy trade negotiators resumed face-to-face talks for the first time in nearly two months on Thursday ahead of high-level talks in early October.

And the German economy started the third quarter on a weaker footing, the Finance Ministry said overnight, with signs emerging of a future rise in unemployment.

Longer-dated yields were down 1 basis point across higher-rated euro zone government bonds  .

"I was a little bit surprised that we have rising (bond prices) this morning; my backdrop was more risk-on environment," said DZ Bank rates strategist Rene Albrecht.

"There was a focus on monetary policy decisions this week and last week but politics is moving into the spotlight again. We have Brexit, Middle East tensions and trade talks [on the table], so it's better safe than sorry," he added.

Optimism from European Commission President Jean-Claude Juncker, who said a Brexit deal is possible and that the much contested Irish border backstop could be replaced by an alternative sent sterling to a two-month high but did little to move bonds.

Analysts will be eyeing Germany's climate protection package, expected later today, for further signs of fiscal stimulus from euro zone economies.

Reuters sources have said the package, which is in part aimed at stimulating innovation to reduce emissions, could cost at least 40 billion euros by 2023.

Fiscal stimulus has been a key focus for bond markets since European Central Bank chief Mario Draghi repeatedly called for fiscal stimulus to support monetary easing measures

The Netherlands and Finland this week announced budgets that will step up government spending.

"Visions from the German climate cabinet could put the upper-end of the yield range to the test, while possibly underwhelming near term commitments provide support," Commerzbank analysts wrote in a note.