Aussie bonds off lows on weak data, steady RBA

SYDNEY, Oct 5 (Reuters) - Australian bond futures rose off five-month lows on Wednesday following the Reserve Bank of Australia's (RBA) decision to keep official interest rates on hold and weaker-than-expected domestic data.

The December 10-year bond futures contract rose 0.055 points to 94.620 by 4:30 p.m. (0630 GMT), well above Tuesday's trough of 94.525, with traders saying a further technical rebound could push values as high as 94.720 depending on the strength of U.S. Treasuries.

Three-year futures firmed 0.6 points to 94.67, against a low of 94.57 on Tuesday with potential seen for a retracement to around 94.75/77.

The market made up some ground after the RBA elected to keep rates unchanged at 5.50 percent for the seventh consecutive month, though the outcome was widely expected.

More of a surprise was the 8 percent drop in August building approvals, after most economists had forecast a modest rise, giving evidence of a cooling housing market and backing the RBA's neutral rate bias.

"People are starting to dip their toe back in the water again and thinking these levels look like much better value," said RBC Capital Markets senior economist Michael Every.

"Today's data really just added to that, and helped reassure the market that the RBA aren't looking to leap on an interest rate hike in the near term," Every said.

However, there is growing speculation that the central bank may need to return to a tightening bias if the domestic and world economies remain strong and high energy prices begin to feed through to broader inflationary pressures.

Although the RBA makes no statement when it leaves its policy unchanged, the central bank's view may be clearer when deputy governor Glenn Stevens speaks on the economic outlook next week.

Aussie bonds were also propped up by mild gains in U.S. Treasuries, after a widespread sell-off in the past month.

Still, general sentiment in the U.S. market remains bearish, fuelled by two Federal Reserve officials both saying on the U.S. central bank would continue to tighten monetary policy due to ongoing concerns over inflation.

With no further domestic data due this week, the market is expected to be led by movements in U.S. Treasuries, ahead of housing finance, consumer sentiment and employment data due next week. ---------------(Snapshot at 4:30 p.m./0630 GMT)----------------

 FUTURES                                   CASH YIELD 90-DAY
BILL (Dec) 94.35 (+ 0.02) 5.67 (5.67) 3-YR
BOND   (Dec) 94.67 (+ 0.06)  5.31 (5.38)
10-YR BOND  (Dec) 94.620(+0.055) 5.38 (5.43)
AUD/USD 0.7602 (0.7626) US 10-YR 4.36 (4.40)
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AUD VS   2-YR           10-YR           *AUD 3-YR/10-YR SPREAD
USD      +109 (+112)    +101 (+103)     *FUTURES    +5.0 (+3.5)
CAD      +195 (+199)    +143 (+144)     *AUD 2-YR/10-YR SPREAD
NZD       -83 (- 80)     -57 (- 55)     *CASH       +08  (+ 07)
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