Australian three-year bond futures prices fell after the Reserve Bank of Australia flagged an end to the interest rate cutting cycle.
As expected, the RBA kept the cash rate unchanged at a record low of 2.5 per cent at its first board meeting of the year.
It also said there won't be anymore changes in the cash rate for the foreseeable future, thanks to a lower Australian dollar and improvement in the local and global economies.
"On present indications, the most prudent course is likely to be a period of stability in interest rates," RBA governor Glenn Stevens said.
Nomura head of macro products Jon Linton said the RBA's decision to remove the bias to cut the cash rate was a surprise to markets.
"Bonds have sold off a little bit," he said.
"I think the sell off is significant given the backdrop of a lot of global uncertainty and a lot of global nervousness and frankly a terrible performance by equities globally.
"In that environment you would expect the bond market to rally."
Mr Linton said the he expects Australian bond perform not as well as the larger overseas bond markets as traders increasingly factor in the likelihood of an interest rate hike by the RBA.
At 1630 AEDT on Tuesday, the March 2014 three-year bond futures contract was at 97.090 (2.910 per cent), down from 97.130 (2.870 per cent).
The March 2014 10-year bond futures contract was trading at 96.065 (implying a yield of 3.935 per cent), level with the local close on Monday.
Longer dated bond products tend to be affected by overseas factors, while shorter dated bonds are mostly moved by local events.
On Friday, the RBA releases its quarterly statement on monetary policy.
Mr Linton said investors will be looking for revisions to the central bank's inflation forecasts after the December quarter figures were higher than expected.