The Hong Kong Monetary Authority will issue a further HK$4 billion in Exchange Fund bills, a special form of debt, in a move to meet demand for the paper and help local banks seeking liquidity. Analysts said that while the action would not ease interbank rates directly, it was in line with new government measures designed to help lenders obtain funding. 'There has been an unusually strong demand for Exchange Fund paper by banks for liquidity management purposes because of heightened credit and liquidity concerns,' the HKMA said. To meet the demand, the de facto central bank will increase its normal offering of three-month Exchange Fund bills in the two upcoming tenders to HK$2 billion each on October 28 and November 4. The HKMA is issuing the notes because demand has been high as banks, fearful of lending to each other, seek a safe place to park their funds. At the same time, banks can then use the notes as collateral when they need to borrow for liquidity. The HKMA, using Hong Kong dollars, bought the equivalent amount of US dollars to prevent the liquidity of the banking system from being reduced because of the issuance. In January, the HKMA issued an extra HK$6 billion in Exchange Fund paper to help smooth payment settlements between banks at a time of rising turnover in the stock market. 'Increasing the supply of Exchange Fund paper can also improve banks' access to the discount window - a funding facility for banks - and other liquidity facilities introduced by the HKMA,' said its chief executive Joseph Yam Chi-kwong. The HKMA has introduced emergency measures to help banks obtain funding. These include direct lending to banks, widening the scope of the discount window by extending the lending period and accepting US dollar assets, not just Exchange Fund bills, as collateral. 'The move can ease the demand on paper even though it will not ease interbank rates directly,' said Frances Cheung, a fixed-income strategist at Standard Chartered Bank. She said the demand for Exchange Fund paper was so strong recently that some paper even had a negative yield. In other words, banks had to pay a premium for the debt, so the return on the bills was less than the cost of the funds. Interbank rates fell across the board yesterday. The one-month interest rate dropped to as low as 3.1 per cent to 3.2 per cent at one point from about 4 per cent last Friday. One analyst said the fall mainly tracked US dollar interest rates, which slid after several central banks committed to support their lenders. But the HKMA's temporary liquidity injection, before it actually issued the extra Exchange Fund paper, helped to lower short-term interest rates. 'Whether the Hong Kong interbank rate would go down further depends on the external market condition,' the analyst said. The Hong Kong dollar traded at HK$7.757 to the US dollar in the late afternoon yesterday.