Bond futures point to July rate cut

Australian bond futures prices are rising as an interest rate cut by the Reserve Bank next month becomes more likely.

Australian bond futures prices are rising as an interest rate cut by the Reserve Bank next month becomes more likely.

Official data this week showed that Australia's annual rate of gross domestic product growth in the March quarter fell below 3 per cent for the first time in over two years.

UBS interest rate strategist Andrew Lilley said traders thought that the falling Australian dollar would mean a cash rate reduction would be unlikely.

"Now we're starting to see a reversal of that expectation follow the GDP data," he said.

"What we've seen over the past two days has been a re-pricing of those expectations around July and August."

On Monday the futures market was pricing in a 15 per cent chance of a cash rate cut in July, and on Friday Mr Lilley said that had increased to about 60 per cent.

"On that basis most bonds have been rallying," he said.

Late on Friday, the June 10-year bond futures contract was trading at 96.745 (implying a yield of 3.255 per cent), up from 96.660 (3.340 per cent) on Thursday. The three-year contract was at 97.530 (2.470 per cent), up from 97.460 (2.540 per cent).

The key indicator of US employment, non-farm payrolls for May, were due out on Friday night.

Market forecasts had originally centred on the number of jobs in the US economy rising by 168,000 in the month. However, that figure might be end up being smaller after a private sector US payrolls report for May was weaker than expected.

Meanwhile, the Australian dollar closed slightly higher after it was taken on a roller-coaster ride over the past 24 hours.

On Thursday afternoon the currency dropped to an almost three-year low of US94.35¢, but in offshore trade on Thursday night it had gained almost US2¢ before backtracking.

Late on Friday, the dollar was trading at US95.23¢.

"Currency markets have not been for the faint of heart this week with large intraday moves becoming the norm," CMC Markets foreign exchange dealer Tim Waterer said.