The Australian bond market was mixed this morning ahead of the Reserve Bank of Australia's board meeting and interest rate decision.
At 0830 AEST, the June 10-year bond futures contract was trading at 94.565 (implying a yield of 5.435 per cent), up from 94.550 (5.450 per cent) on Monday.
The June three-year bond futures contract was at 94.860 (5.140 per cent), down from 94.870 (5.130 per cent).
The RBA board meets on Tuesday, and is expected widely to keep its cash rate unchanged at 4.75 per cent, but 11 out of 13 economists surveyed by AAP are expecting a rate rise in the September quarter.
Last Wednesday, The Australian Bureau of Statistics reported the consumer price index had risen by 1.6 per cent in the March quarter for an annual inflation rate of 3.3 per cent.
This surprised the market, which had forecast a 1.2 per cent rise in the CPI for the quarter for an annual pace of 3.0 per cent.
The RBA uses its control over the cash rate to keep inflation between two to three per cent over the course of the economic cycle.
Westpac senior market strategist Damien McColough said the bond market was quiet ahead of Tuesday afternoon's interest rate announcement.
"It's the calm before the storm. 2.30 pm today is the real moment," Mr McColough said.
"The market, following the CPI, priced in that there is more chance of the RBA being more vigilant than they were a week ago, and you'll probably hear that in the statement today," he said.
"Our view is that August is going to be the first month they are likely to raise the rate, and the market is priced for that, as well."
Mr McColough said the short statement from the central bank after the board meeting would likely move Australian bond futures.
"With three-years (June bond futures) at 94.860, it is probably pretty finely positioned. A hawkish statement gets you down into mid-70s, and a dovish statement gets you back to 94.920.
"We're sort of mid-range."
There had not been much reaction to Monday's news of the death of al-Qaeda leader Osama bin Laden in bond markets, Mr McColough said.
"There was some initial euphoria in the equity markets and the US dollar, but it all came back pretty quickly."
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