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Aust bonds stronger despite China data

Australian bond futures prices are higher after the market shrugged off stronger Chinese manufacturing figures and continued to focus on weaker domestic inflation data.

ANZ head of interest rate research Tony Morriss said the release of domestic consumer price index (CPI) figures from Wednesday had been the main driver of the market over the past 24 hours.

Figures released by the Australian Bureau of Statistics show consumer prices rose 2.2 per cent in the year to December, below expectations of 2.5 per cent growth.

The Reserve Bank of Australia has a target range of two to three per cent annual growth, which informs its monthly interest rate decision.

Mr Morriss said the ongoing reaction to the CPI figures had overshadowed news China's manufacturing sector expanded at its fastest pace in two years in January.

"It has retained a firmer tone today from the CPI and global factors, even though the Chinese data was solid," he said.

HSBC's flash purchasing managers' index (PMI) reached 51.9 for January, released on Thursday, up from a final 51.5 in December.

Mr Morriss said local bond futures were likely to be well supported in the lead up to the RBA's February 5 meeting.

He said the odds of a rate cut had improved following the CPI figures, though most traders still expected the RBA to keep the cash rate on hold at three per cent at the meeting.

"I think markets are pricing in a bit of an each way bet after pricing out a lot of the easing so that probably keeps us well supported," he said.

At 1630 AEDT on Thursday, the March 10-year bond futures contract was trading at 96.750 (implying a yield of 3.250 per cent), down from Wednesday's close of 96.730 (3.270 per cent).

However, the March three-year bond futures contract was at 97.330 (implying a yield of 2.670 per cent), up from 97.280 (2.720 per cent).