HONG KONG - The Hong Kong government hopes to sell HK$50 billion (S$9.41 billion) of sovereign bonds, the biggest-ever Hong Kong dollar bond issue, in September to deepen the local bond market, an industry source said on Wednesday.

The deal comes as the territory's money market is flush with funds injected by the monetary authority to keep the territory's pegged currency within its trading band.

The bond issue, the first part of a HK$100 billion bond programme announced earlier this year, would have maturities of between 2 and 10 years, with expected coupons starting at below 1 percent per annum, the source told Reuters.

"The size is big, as the government would like to make an impact on the market," he said.

The issue size is two and a half times the previous biggest offering - also by the Hong Kong government, in 2004.

Two-years Exchange Fund notes issued by Hong Kong's central bank, the Hong Kong Monetary Authority, yielded 0.699 percent at noon on Wednesday.

Yields fell by half a basis point despite the news about the bond issue after a exchange fund bill tender was more than four times subscribed, indicating flush conditions.

Money is pouring into Hong Kong's financial markets on growing hopes that a turnaround in China's economy will help pull the territory out of recession. The inflows have pushed the Hong Kong dollar, which is pegged to the U.S. dollar, to the top of its trading band.

Under Hong Kong's currency peg system, the Hong Kong Monetary Authority (HKMA) is obliged to intervene if the Hong Kong dollar, which can trade between 7.7500 and 7.8500 to the U.S. dollar, hits the upper or lower limit of its trading band.

Earlier this year, Financial Secretary John Tsang said the market could absorb HK$10 billion to HK$20 billion of government bonds per year.

But Hong Kong lawmakers criticised the government's earlier proposal to issue HK$30 billion initially as being "too small" to make an impact on the market.

The government has raised the proposed amount to HK$50 billion and will seek approval, either this month or in July, from the territory's lawmaking body, the Legislative Council.

"If the resolution is passed, the bonds can be launched in September," the source said.

The sum raised will be credited to a bond fund to separate it from the general government revenue pool, and the funds will be used for making investments.

The bonds are seen drawing a good response from a yield-hungry market suffering abysmally low returns.

"The growth trend in bonds outstanding has been linear, whereas liquidity has increased tremendously," said Jens Lauschke, analyst with DBS Bank.

"Everything suggests the demand should be good because at the front end you don't get a lot of yield. People are moving further out the curve," he said.

Scarcity and a high credit rating also lend support.

The government of Hong Kong has a AA-plus rating, the second highest, from Standard & Poor's with a "stable" outlook.

The Hong Kong government has issued only a limited quantity of bonds. The last time was in 2004, when it sold HK$20 billion worth in a one-off issue and sold another HK$6 billion to fund tunnel and bridge construction projects

The BOC Group, Merrill Lynch and HSBC were arrangers and joint global co-ordinators for the government bond in 2004.