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Monday, August 17, 2009

Is Malaysia ready for retail bond market?

Malaysia is ready to open up the bond market to retailers towards providing another alternative investment option for the individual investors, said CIMB Group’s deputy chief executive officer (group treasury and investments) Lee Kok Kwan. With the persisting low interest rate environment, the discussion about opening up the bond mrket to retail investors has been heating up, although not everyone is in agreement that it should be done.

Criticisms range from the affordability of bonds to the complexities involved in bond trading, which can arguably be beyond the grasp of the average retail investor. Bonds, with their fixed return rates, are typically considered safer investing instruments than equities, although the relative ratings of the instruments must be taken into consideration.

Speaking to The Edge Financial Daily recently, Lee said the next major step forward for the local debt market would be to implement retail-side service. “The next big step is the retail bond market. Typically, you don’t want to let retailers invest in credit ratings that are too far down the credit curve to protect them because they are not in the same position as a big unit trust or big fund manager to study the credit terms. You would want to have some minimum standards and credit rating they can buy into. Having said that, once you allow them access into the bond market, the yield is much higher than bank deposits.”

Moreover, there is an argument to be made that the papers of some corporates, or private debt securities (PDS), which are highly rated — AA or higher — are safer investment instruments than some of the equities available on Bursa Malaysia presently.

Lee said the bond market did not need to incur additional costs, but could use the same existing platform of the equities market. “When you develop a retail bond market, you don’t want to create unnecessary costs. Just piggy-back on the stock exchange infrastructure and use the same platform. Instead of quoting equities, you list the bonds there. Instead of dividends, you have a coupon.

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