Government Bond Market Development in Asia
because institutional investors, wary of corporate credit risks, nd thempreferabledespite their lower yieldsin light of the certainty that therecan be no default in government securities.The increase in the supply of government bonds may result in amore reective yield curve, and it is important that they take on the roleof benchmarker. Benchmark securities should have a regular and pre-dictable issuance schedule with a whole spectrum of maturities, shouldbe actively traded, very liquid, and responsive to market conditions.While not risk-free, the risk should be stable, predictable and easilyassessable. Having a reliable benchmark, the corporate bond market wouldbe able to come out with an array of its own issues, with risk premiabased on how they rank against the government securities, and eventu-ally ourish.The investor base in the Malaysian bond market is mainly com-prised of banks and asset and pension funds, as certain institutionalinvestors are required by statute to invest a portion of their total fundsin government securities (designated as liquid assets). or example, provi-dent and pension funds are required to invest a minimum of 50 percentof their total investible funds in such securities. The largest of these isthe EP.This requirement has many advantages for the economy. It allowsxed-rate cheap fund-raising for the countrys development needs, andallows the Government to exibly structure the maturity prole of itsdebts to match the tenor of its nancing needs. It also gives the CentralBankBank Negara Malaysia (BNM)an e¬ective tool to manage thelevel of market liquidity, thereby inuencing and setting the level of interest rates.It provides a safety net in case of unexpected demands for liquid-ity, giving depositors some protection for their monies, increases condencein the banking institutions, and o¬ers a reasonable return on invest-ments over the average ination rate.However, it also results in a captive market for bonds, creatingarticial demand that distorts yields. These bonds are inevitably lockedup and held until maturity, especially by the pension funds, further in-hibiting the development of a secondary market. In the absence of ane¬ective hedging instrument, this passive portfolio management mayalso lead to a higher risk prole of the mandatory holders of the bonds.The current dominance of the nancial institutions and large pen-sion funds ignores the needs of retail investors in search of securelong-term investmentseven though the minimum denomination forgovernment bonds is set at RM1,000.00.