Bonds firms as oil prices drop

The bond market is firmer as the lowest crude oil prices in more than five years stir concerns about deflation in the US.

A siege in Sydney's Martin Place also reduced trading volumes, as the offices of several major financial institutions were evacuated.

The bond market strengthened after the International Energy Agency cut its oil-demand forecast for 2015, and oil prices fell below $US60 a barrel for the first time since July 2009.

Commonwealth Bank fixed income strategist Philip Brown said the US Federal Reserve was still slightly concerned about deflation.

"If you get a significant fall in the oil price, it puts a deflationary shock through the economy," he said.

There was a muted reaction to the federal government's mid-year budget update, which showed the deficit for 2014/15 had blown out to $40.4 billion, from the $29.8 billion predicted in the May budget.

"It was largely factored in," Mr Brown said of the update.

The Sydney siege caused trading volumes for three-year bonds to fall below 95,000, about 37 per cent below November's trading average, Mr Brown said.

"It's significantly down," he said.

At 1630 AEDT on Monday, the March 2015 10-year bond futures contract was trading at 97.090 (implying a yield of 2.910 per cent), up from 97.085 (2.915 per cent) on Friday.

The March 2015 three-year bond futures contract was at 97.785 (2.215 per cent), up from 97.750 (2.250 per cent).