Aust bonds up on Fed decision, China data

Australian three year bond futures are higher after the US Federal Reserve announced it would extend its bond buying program and Chinese data showed that country's manufacturing sector continued to shrink.

Westpac senior market strategist Damien McColough said bond prices fell overnight after the US Federal Reserve disappointed markets by announcing it would extend its bond-buying program.

In the early hours of Thursday (Australian time), the Fed announced a $US267 billion ($A262.89 billion) extension to its economic stimulus programs, called Operation Twist, aimed at reducing long-term interest rates.

Meanwhile, Chinese data released on Thursday showed the country's manufacturing sector continued to contract.

The HSBC China Manufacturing Purchasing Managers Index fell to 48.1 in June compared, down from 48.4 in May.

The index has remained below 50, indicating the sector has contracted, for the past eight months.

"It's been one of those days when the market has been all over the place but the Fed gave us the lead in the morning," Mr McColough said.

However, Mr McColough said the market remained preoccupied with Europe's sovereign debt crisis.

"The fact of the matter is this is all about the European situation so we'll see what sort of headlines we have to face tonight.

At 1630 AEST on Thursday, the September 10-year bond futures contract was trading at 96.870 (implying a yield of 3.130 per cent), down from 96.880 (3.120 per cent) on Wednesday.

The September three-year bond futures contract was at 97.500 (2.500 per cent), down from 97.710 (2.290 per cent).

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