Euro zone bond yields steady after mixed PMIs

By Samuel Indyk and Yoruk Bahceli

LONDON, Sept 23 (Reuters) - Euro zone bond yields were little changed on Tuesday after the release of mixed business activity data from the bloc and heavy government bond issuance.

The HCOB Flash Eurozone Composite Purchasing Managers' Index, compiled by S&P Global, edged up to 51.2 in September from 51.0 in August, the ninth consecutive month of growth. A reading above 50 indicates expansion while below signals contraction.

But an index measuring composite new business dipped to the breakeven point of 50 from 50.3, potentially raising concerns about the sustainability of the bloc's growth.

EXPECTATIONS FOR ECB REMAIN STEADY

"September's flash PMIs suggest that the euro zone economy grew fairly slowly again in Q3 and that price pressures eased," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

Germany's 10-year yield DE10YT=RR, the euro zone benchmark, was little changed after the data at 2.745%, just below a two-week high of 2.762% reached on Monday.

Market expectations for European Central Bank easing remained steady after the data, keeping shorter-end yields little changed.

Futures markets are pricing in about 12 basis points of easing by June next year, implying a less than 50% chance of another rate cut.

The central bank last cut the deposit rate in June, lowering it to 2%, before holding interest rates steady at the last two policy meetings.

"Markets are not fully pricing any ECB action going forward but there's always the threat in the air that they might be forced to lower the deposit rate again," said René Albrecht, an analyst at DZ Bank.

POWELL DUE TO SPEAK LATER

Investors were also hoping for some clarity from the Federal Reserve on Tuesday after it resumed its rate cutting cycle last week but provided mixed communication on the future path for interest rates.

New Fed governor Stephen Miran outlined his reasons for wanting lower rates on Monday, a view that was countered by three colleagues who feel the central bank needs to remain cautious because of inflation.

Fed chair Jerome Powell is scheduled to speak on the economic outlook later on Tuesday.

Germany's policy-sensitive two-year yield DE2YT=RR was up less than 1 bp at 2.023% after matching its highest since April on Monday at 2.03%.

Attention was also on bond supply on Tuesday, with the Netherlands selling 5 billion euros ($5.90 billion) of 30-year bonds, the top end of the targeted sale amount.

The long-end auction precedes the overhaul of the Dutch pension system next year. The change to a defined contribution system, as opposed to defined benefit, would mean pension funds will have less need to buy bonds, and longer-dated bonds in particular, as they will no longer promise specific long-term benefits.

JaapTeerhuis, strategist at ABN AMRO who used to lead the dealing room for the Dutch Treasury, said it was difficult to say what the auction results meant for the pension fund transition but added the result suggested the market was happy with current pricing on Dutch bonds.

Longer-dated bonds have been hit in recent months by investor worries over the sustainability of high government debt levels in countries including France, Britain, the U.S. and Japan.

Germany's 30-year yield DE30YT=RR was down 1.5 bps at 3.346%.

($1 = 0.8481 euros)