The Australian bond market opened firmer after a senior US senator warned the American economy could fall back into recession if budget negotiations fail.
US political leaders are in the process of negotiating a way to avoid a "fiscal cliff" - a series of a series of tax hikes and spending cuts due to start in early 2013, that could send the world's largest economy back into recession.
There was some initial optimism after President Barack Obama cut short his Christmas holidays in Hawaii to return to Washington for talks.
But the situation turned tense when Senate Majority Leader Harry Reid, a Democrat, said overnight "it looks like" the US economy will hurtle over the fiscal cliff because House Speaker John Boehner and Republican Minority Leader Mitch McConnell were stalling.
ANZ head of Australian economics and property research Ivan Colhoun said the bond market has been closely following headlines about the US budget negotiations.
"There was some negative news out of that in the middle of the US session, equities sold off quite sharply and the bonds rallied," he said.
"But then there was another headline saying that another session of the US House of Representatives has been scheduled, so equities basically recovered their losses and bonds only gave back half of their gains."
At 0830 AEDT on Friday, the March 10-year bond futures contract was trading at 96.715 (implying a yield of 3.285 per cent), up from 96.680 (3.320 per cent) on Thursday.
The March three-year bond futures contract was at 97.290 (2.710 per cent), up from 97.280 (2.720 per cent).