European bond markets face rate, demand challenges, but interest is strong, debt managers say

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Euro zone borrowers challenged by rates uncertainty

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Dutch pension fund reform, German stimulus, QT in focus

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EU sees increase in international demand for bond sales

(Adds comments from other debt officials, context)

By Yoruk Bahceli

LONDON, Nov 12 (Reuters) - Euro zone governments will need to fine-tune their borrowing due to uncertainties facing their bond markets, but strong demand from foreign investors is helping, debt management officials said on Wednesday.

"The main challenge is that in 2026, there is no clear direction of rates," Rocio Trueba Miralles, deputy head of funding and debt management at the Spanish Treasury told an Association for Financial Markets in Europe conference in Brussels.

The European Central Bank kept interest rates unchanged at 2% for the third meeting in a row in October and traders are betting it is likely done with its easing cycle.

In the longer-term, German fiscal stimulus, a reform of the Dutch pension fund system, and the ECB continuing to wind down its balance sheet will drive volatility, Trueba Miralles added.

The Spanish treasury will face a trade-off between the average cost and maturity of its debt, she said.

Germany's stimulus will lead to a surge in Berlin's borrowing, just as the Dutch reform will reduce demand for long-dated European bonds from a key buyer base.

Purchases of Belgium's long-end bonds had declined this year, likely due to investment changes ahead of the Dutch reform, said Maric Post, director at Belgian's debt agency.

"We no longer face as issuers a trade-off-free world," he said.

But while the bloc's debt markets face uncertainty, its debt has become more appealing to international investors this year as U.S. President Donald Trump's policy agenda has raised concerns around the safe-haven status of U.S. Treasuries.

Siegfried Ruhl, adviser to the European Commission's budget department, which manages its debt sales, said the bloc has seen strong demand from international investors in its bond sales this year.

"We have a significant increase here from investors outside Europe," he said.

Earlier this year, the EU attracted its first large investor from South America, while it has seen strong demand from the Middle East, Africa and other regions, Ruhl added.

The EU has become a major borrower since 2020 to finance a COVID recovery fund with joint debt and will raise more debt on the markets in the coming years to fund defence loans to member states.

Spain's debt has also seen an increase in buying from non-European investors, Trueba Miralles said. Recent ratings upgrades have allowed Spain access to some investors who previously didn't buy longer-dated Spanish debt, Trueba Miralles added.

Spain's credit rating was upgraded by all three big credit rating agencies in September as its economy has continued to outperform European peers.

The Dutch pension reform could also benefit Spain as the Dutch pension funds are not very exposed to Spanish bonds and will now be able to buy more riskier assets, she added. (Additional reporting by Dhara Ranasinghe; editing by Alun John and Philippa Fletcher)