* Benchmark 7-day repo rate rises above 1.0 percent
* Yields of bonds below 5 years rise more than those above
* Yield curve flattening trend seen persisting for now
SHANGHAI, - China's bill and bond yields mostly rose on Monday, with the short end of the yield curve rising even more, mainly because institutional investors are preparing funds for upcoming initial public offerings (IPOs).
The short end was likely to trend higher with more volatility as China resumed IPOs this month after a nearly 10-month halt, but the long end should have less potential, flattening the yield curve further in the near term, dealers and analysts said.
Yields move inversely with bond prices and prices typically fall with less investment liquidity in the market.
"Overall, the market is now dominated by a new liquidity situation after regulators resumed IPOs," said Dong Dezhi, senior debt market analyst at Bank of China in Shanghai.
"But expectations of stable monetary policy are likely to cap the gains of yields at the long end, keeping the curve in a flattening trend for a while."
Last week, Guilin Sanjin Pharmaceutical Co said it would launch an $88 million IPO on June 29, the first such offer since last September.
The market expects more IPO launches soon, including large IPOs such as the one by China State Construction Engineering Corp, which is expected to raise around $1 billion.
"IPOs are typically a more lucrative business in China than in advanced markets, so institutions are now rushing to prepare funds for them," said a dealer at Shenzhen Development Bank.
In response, the weighted average seven-day repo rate rose a solid 10.43 basis points to 1.0976 percent at midday from 0.9933 percent at Friday's close -- reversing a trend in which the benchmark repo rate had mostly fluctuated in the 0.9 to 1.0 percent range since the start of this year.
The indicative 90-day central bank bill yield rose 0.20 bp to 1.0320 percent bid on Monday from 1.0300 percent on Friday, according to Reuters Reference Rates.
Traders said money market funds could become slightly tighter in the coming months due to a slew of IPOs but they did not see funds becoming very tight because the government was expected to keep monetary policy relatively loose.
In a sign of such a policy, the official Shanghai Securities News reported on Monday that China's new lending in the first half of this year might reach 6.5 trillion yuan ($951 billion), as loan growth quickened in June on new infrastructure projects.
New loans in June were expected to exceed the amount in May, after the government lowered capital requirements for such projects and as city lenders sped up lending.
In the government bond market, traders sold bonds on Monday after a relatively lukewarm auction by the Ministry of Finance. It sold 12.2 billion yuan ($1.8 billion) of three-year bonds on behalf of there regional governments.
The bonds were auctioned at a yield of 1.75 percent, up from the last auction for similar local government bonds of 1.72 percent on June 12.
The two-year government bond yield rose 0.46 bp to 1.2987 percent bid while the three-year yield rose 1.00 bp to 1.7045 percent -- both more than the benchmark five- and 15-year yields and helping to flatten the curve.
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