Aust bonds fall on Euro deal

Australian bond future prices have fallen sharply after European leaders agreed to take measures to bring down Spain and Italy's borrowing costs.

Euro zone leaders meeting for a two-day summit in Brussels announced measures to provide direct support to struggling banks, thereby taking pressure off national budgets.

The deal, announced on Friday use the euro zone's 500-billion-euro ($A623.32 billion) bailout fund to recapitalise ailing banks, particularly those in Spain and Italy, directly.

Nomura rates strategist Martin Whetton said the announcement came in the middle of what had been a quiet trading day and caused Australian bond futures to fall sharply.

"There was a rather dramatic fall which was exacerbated by the liquidity," he said.

However, he said future prices regained some of their losses during the afternoon.

"(The sell-off) went too far and the market bounced back about 50 per cent of the fall.

Mr Whetton said that, despite the optimism surrounding the agreement, it wasn't enough to solve the euro zone's sovereign debt crisis.

"It's still not over, it doesn't solve a whole lot just yet," he said.

At 1630 AEST on Friday, the September 10-year bond futures contract was trading at 96.965 (implying a yield of 3.035 per cent), down from 97.035 (2.965 per cent).

The September three-year bond futures contract was at 97.600 (2.400 per cent), down from 97.680 (2.320 per cent).

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