Hong Kong Exchange Fund bills recorded their highest yields in history during yesterday's weekly auction, reflecting the increases in interbank rates following the SAR's defence of its 14-year peg to the US dollar. The average accepted yield for the sale of $5 billion 28-day bills was 12.36 per cent, compared with the one-month interbank fixing rate of 15.6071 per cent at 11 am. This is 4.11 per cent higher than the 8.25 per cent recorded at last week's sale. On the auction held on October 28, the yield on 28-day bills hit a high of 12.28 per cent. The average accepted yield for yesterday's auction of 91-day bills was 11.18 per cent, 2.93 per cent higher than last week's 8.65 per cent. It was still at a wide 4.29 per cent discount to the benchmark three-month interbank fixing rate, meaning banks must pay an opportunity cost of about 4.29 per cent to invest in government bills instead of lending in the market. These yields were at their highest levels since the Exchange Fund bills issuance programme was launched in 1990. Banks in Hong Kong are required to maintain a holding of Exchange Fund bills, which can be used as collateral to get emergency funding from the SAR's discount window, the Liquidity Adjustment Facility (LAF). Standard Chartered Bank treasurer Stanley Wong Yuen-fai said banks were trying to minimise their use of the facility amid fears they were being mis-identified as financiers for the speculators against the Hong Kong dollar. The authority issued a circular on October 23 warning banks that repeated LAF users might be charged penal rates in order to deter them from using the authority's funds to finance speculators through the LAF. The move in effect reduced the demand for Exchange Fund bills, pushing up the yields further. The authority issued another remark last Friday reiterating normal use of the LAF for day-to-day operations will not be penalised. Mr Wong said this remark failed to serve its desired purpose of comforting the market and banks were still reluctant to lend, pushing rates up further.