Economic Tensions: Euro Zone Bonds Face Uncertain Future

Euro zone bond yields remained largely unchanged on Tuesday in response to mixed business activity data from the bloc, along with substantial government bond issuance. The HCOB Flash Eurozone Composite Purchasing Managers' Index (PMI), compiled by S&P Global, nudged higher to 51.2 in September from 51.0 in August. This marks nine consecutive months of growth. A reading above 50 suggests expansion; below, indicates contraction. However, a separate index measuring composite new business fell to the breakeven mark of 50, down from 50.3, raising questions about the bloc's growth sustainability.

Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, noted, "September's flash PMIs suggest that the euro zone economy grew fairly slowly again in Q3 and that price pressures eased." Following the data, Germany's 10-year yield, the euro zone benchmark, remained unchanged at 2.745%, slightly below the recent two-week high of 2.762%. Market expectations for European Central Bank (ECB) easing were steady, with shorter-end yields unaffected.

In addition to expectations for ECB, market participants were keenly watching the U.S. Federal Reserve, awaiting a speech from Fed chair Jerome Powell for insight into future monetary policy. Meanwhile, bond supply attracted attention, with the Netherlands auctioning 5 billion euros of 30-year bonds, hitting the upper end of the targeted amount. These developments precede the Dutch pension system overhaul next year, which shifts to a defined contribution scheme, affecting demand for longer-term bonds.

(With inputs from agencies.)