Australian bond futures prices are higher as worries about a new insurgency in Iraq spark a bout of cautious trade.

Islamic militants are pushing toward Baghdad after capturing a town to the north of the capital.

The US is considering air strikes to help the stretched Iraq security forces.

St George economist Janu Chan said financial markets avoided riskier assets overnight as a result, which boosted bond markets.

“Risk aversion took hold last night as violence escalated in Iraq and US President Obama failed to rule out military action,” she said.

“US economic data also missed expectations which also may have added to investor nervousness.”

US retail sales rose 0.3 per cent in May, which was below the 0.6 gain the market was expecting.

At 0830 AEST on Friday, the June 2014 10-year bond futures contract was trading at 96.205 (implying a yield of 3.795 per cent), up from 96.175 (3.825 per cent) on Thursday.

The June 2014 three-year bond futures contract was at 97.155 (2.845 per cent), up from 97.150 (2.850 per cent).