THE first issue of three-year Exchange Fund notes will be launched next week by the Hong Kong Monetary Authority. The long-awaited development is expected to boost the local capital market. The market responded positively to the issue. Active pre-issue trading yesterday set the price of the bond at 35 to 45 points above its par level, the supposed issue price. ''The three-year bond will give the market one more hedging tool, against any fixed-rate lending or borrowing commitments,'' said Yeung Chun-wai, assistant vice-president in the treasury department of Union Bank of Switzerland. Companies with long-term fixed-rate commitments usually hedge their risk in the bond market, thus minimising their exposure in case the interest rate moves in a direction opposite to their expectation. He said turnover yesterday on the new issue had been larger than the proposed issue size, reflecting the issue's popularity among market dealers. The issue will be similar to the two-year Exchange Fund Notes Programme, which came out in November 1991. Three-year notes to raise $500 million will be issued on a quarterly basis. ''It took about two years before the authority decided to issue notes with maturity longer than two years, giving the market sufficient time to get used to the operations,'' Mr Yeung said. The market, which has been anticipating the issue for the past few months, would then have a benchmark for longer-term debt securities, he said. The authority's chief executive Joseph Yam said notes with much longer maturity such as five years would be considered, depending on how the three-year ones were received. He confirmed that agreement had been reached with the Chinese Government that the notes could be carried beyond 1997. Another $100 million for each issue will be held as reserve by the authority for supply to market-makers in the secondary market. The notes will carry interest at the rate of 4.2 per cent a year, equivalent to US Treasury paper of the same maturity, paid six-monthly in arrears. The two-year Exchange Fund Notes Programme, which will replace the government bonds as they mature, has been warmly welcomed by the financial community since their inception. The authority had sounded out market reaction to extending the maturity to three years. The tender will be held next Monday for settlement on Tuesday.