The People's Bank of China auctioned 1 billion yuan ($156 million) of three-year bills in its open market operations on Thursday at 3.97 percent, up 8 basis points from 3.89 percent at the last sale, in line with market expectations.

It also auctioned 7 billion yuan of three-month bills at a yield of 3.1618 percent, up 8.17 bps from last week's 3.0801 percent, which was also in line with market forecasts.

The market had expected the yields of three-month and three-year bills to climb 8 to 9 basis points after the unexpected increase in the one-year bill yield on Tuesday, due to investor caution.

Traders said they widely expected no immediate interest rate rise in the near term due to caution over the current turmoil in global financial markets, although rises in the three-month and three-year bills could spark new worries over an interest rate hike.

"This just follows the rise in one-year bill yields," said a dealer at a major securities house in Shanghai. "We also have no expectation of further tightening due to the mess in overseas markets, although the higher yields could affect investor sentiment."

On Tuesday, the PBOC unexpectedly lifted the yield of one-year bills by 8.6 bps, fuelling market expectations that it may be shifting more aggressively to drain funds via open market operations without having to immediately change monetary policy.

With the rise in bill yields, underscoring healthy demand, the PBOC may continue to use this method to drain more funds in the next several weeks, dealers said.

The PBOC is on course to inject a net 38 billion yuan through its regular open market operations this week. Last week, it conducted a net injection of 70 billion yuan into the market.

The central bank has raised interest rates five times and bank reserve requirement ratios nine times since last October in its latest cycle of monetary tightening.

Copyright Reuters, 2011