* Bonds rally as nervous investors seek safety * Aussie, NZ dollar soft on poor demand for risk * Investors mull chance of interest rate cut in Australia By Mantik Kusjanto and Koh Gui Qing SYDNEY/WELLINGTON, Aug 25 (Reuters) - Ten-year Australian and New Zealand government bond yields fell towards multi-month lows on Wednesday as skittish investors sought refuge in the relative safety of sovereign debt worldwide. Analysts said Asian investors who had cash to spare, but were reluctant to plough funds into other riskier assets, were among buyers of the countries' higher-yielding debt. The nervous mood in market, characterised by losses across major Asian stock markets, hurt demand for the Australian and New Zealand dollars. The Aussie dollar was soft at $0.8839 and the New Zealand dollar was sluggish at $0.7025. Australia's 10-year yield <0#AUBMK=> hit a 15-month low of 4.775 percent, leading the yield curve -- or the spread between three- and 10-year yields -- to flatten a touch to 48.2 basis points. Australian bond futures rallied hard. The three-year contract surged 0.08 points to 13-month highs of 95.64. Ten-year futures jumped 0.07 points to a 15-month peak of 95.22. New Zealand's 10-year yield <0#NZBMK=> stood at 5.17 percent, within sight of a 16-month low of 5.14 percent hit last week. But some analysts doubt the rally in bonds, in part driven by angst the U.S. economy may have another recession, can last. "I still consider yields too low, particularly at the Australian front-end," said Peter Jolly, an analyst at National Australia Bank. "We are well into the thin air zone, where further gains by bills and short-bonds means the market has to keep upping the odds of still highly improbable near-term Australia rate cuts." Certainly, investors on Wednesday saw more chance of an Australian rate cut than they did just a month ago. Interbank futures <0#YIB:> showed the market was pricing a 42 percent chance the Reserve Bank of Australia (RBA) would cut its 4.5 percent cash rate to 4.25 percent by Christmas. The vast majority of analysts think there is very little chance of a cut given the RBA's optimism about the domestic and Asian outlooks. However, both JPMorgan and RBC on Wednesday pushed out the timing of the next hike into early 2011 citing growing uncertainty over the U.S. and European economies. Bets for a RBA rate cut has led to an inverted bill curve <0#YBA:>. The implied yield for bills in September 2011 stood at 4.7 percent, below next month's implied yield of 4.71. The flattening in cash yield curves led the swap curves to flatten too. Australian interest rate swaps fell across tenors to multi-month lows, leading the curve to flatten to 47 basis points. New Zealand swap rates were down about one basis point across the curve. VULNERABLE TO MOOD SWINGS Traders and analysts said the Australian and New Zealand dollars would remained vulnerable to the dour market mood for some time, with domestic data being less of a factor. "With no local data out for the remainder of the week, the kiwi is at the whim of equity markets and risk sentiment," said ANZ National rate strategist David Croy. He expected the NZ dollar to stay in the $0.7000/$0.7080 range and 58.50/60.25 yen. The kiwi recovered to 59.05 yen from a 13-month low of 58.62 yen on fears Japanese authorities may intervene to weaken its rising currency against the dollar. In Australia, solid data for construction spending in the second quarter was also largely brushed aside. [ID:nSGE67N01D] Near-term resistance for the Aussie is at the hourly high of $0.8873, and support at $0.8781, the 38.2 percent Fibonacci retracement of its May to August ascent. Against the yen, the Aussie was supported at Tuesday's low of 73.57 . Resistance is at 74.85, then 74.45.

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