* Core government bond yields edge down
* Moves modest ahead of Fed rate decision Wednesday
* Netherlands expected to loosen up budget (Updates throughout, adds Dutch budget, Italy developments, Lagarde)
By Yoruk Bahceli
LONDON, Sept 17 (Reuters) – Euro zone government debt yields edged lower on Tuesday as geopolitical uncertainty following the weekend attack on Saudi oil facilities underpinned a cautious tone in bond markets ahead of this week’s expected U.S. rate cut.
Saturday’s attack, which shut 5% of global crude output, caused the biggest surge in oil prices since 1991 on Monday, sending investors flocking to safe haven assets.
Topped by uncertainty around Brexit, this halted a sell-off in euro zone government bonds after yields reached six-week highs last week.
U.S. President Donald Trump said on Monday he did not want to go to war, and added that the United States was still investigating if Iran was behind the Saudi strikes.
Meanwhile, British Prime Minister Boris Johnson said on Monday that a Brexit deal was beginning to emerge, but the EU said he had offered nothing to break the impasse.
“We’ve seen some flight to quality going into Bunds but taking into account what happened last week those moves remain rather limited – I think that’s because we have the Fed [coming up],” said KBC rates strategist Mathias van der Jeugt.
The Federal Reserve is expected to cut rates by 25 basis points when it concludes its two-day meeting on Wednesday.
Longer-dated euro zone government bond yields were a touch lower on the day .
Germany’s 30-year yield was down 1 bps to 0.05%. Its 10-year benchmark yield also marginally lower at -0.48%.
Focus is shifting back to the potential for fiscal stimulus from fiscally-prudent euro zone governments, with the Netherlands looking set to loosen its 2020 budget on Tuesday.
The decision to relax fiscal discipline would come just a week after European Central Bank President Mario Draghi urged governments to spend more to avoid a downturn in the euro zone.
Earlier this week, plans for a Dutch investment fund of up to 50 billion euros were leaked in newspapers.
“If we see that [the leaked plans] reflected in the budget we could have more Triple A debt sales… we could have some kind of sell-off on core debt,” said Natixis fixed income strategist Jean-Christophe Machado.
Italy’s bond markets underperformed, with the 10-year benchmark yield up 3 basis points to 0.89%.
Former Prime Minister Matteo Renzi, who was instrumental in negotiating Italy’s new coalition government, said he would break away form the ruling Democratic Party (PD) as he sought to set up a new centrist force in the country.
“In coming months the resignation of Renzi might not be that impactful, with Gentiloni leading negotiations between Brussels and Italy,” Natixis’ Machado said.
Analysts say the appointment of former Premier Paolo Gentiloni as the EU economic affairs commissioner is likely to help smoothen ties.
The European parliament meanwhile backed Christine Lagarde as the next ECB chief on Tuesday. (Reporting by Yoruk Bahceli; Editing by Angus MacSwan and Alexander Smith)
LINK ORIGINAL: Reuters