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

Euro zone governments will need to refine their borrowing because of the uncertainties facing their bond markets, but strong demand from foreign investors is helping, debt management officials said on Wednesday.“The biggest challenge is that there is no clear direction for interest rates in 2026,” Rocio Trueba Miralles, deputy head of financing and debt management at Spain’s finance ministry, told an Association for Financial Markets in Europe conference in Brussels.

The European Central Bank kept interest rates unchanged at 2% for the third time in a row in October, and traders are betting the easing cycle is likely over.
In the longer term, German budgetary impulses, a reform of the Dutch pension fund system and the ECB’s continued balance sheet reduction will drive volatility, Trueba Miralles said.

Spain’s treasury will face a trade-off between average costs and the maturity of its debts, she said.

Germany’s stimulus measures will lead to a surge in Berlin borrowing, just as the Dutch reform will reduce demand for long-term European bonds from a key buyer base. Purchases of Belgian long-term bonds have fallen this year, likely due to investment changes ahead of the Dutch reform, said Maric Post, director of the Belgian debt agency. “As issuers, we no longer face a world without trade-offs,” he said.But while the bloc’s debt markets face uncertainty, its debt has become more attractive to international investors this year as US President Donald Trump’s policy agenda has raised concerns about the safe-haven status of US government bonds.

Siegfried Ruhl, an adviser to the European Commission’s budget department, which is managing debt sales, said the bloc has seen strong demand from international investors for 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 major investor from South America amid 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 in the markets in the coming years to finance defense loans to member states.

Spain’s debt burden has also led to an increase in purchases from non-European investors, Trueba Miralles said. Recent rating upgrades have given Spain access to a number of investors who previously did not buy longer-dated Spanish debt, Trueba Miralles added.

Spain’s credit rating was upgraded by all three major rating agencies in September as the Spanish economy continued to outperform its European peers.

The Dutch pension reform could also benefit Spain because Dutch pension funds are not very exposed to Spanish bonds and will now be able to buy riskier assets, she added.