This definitely sounds like the wrong behavior, but it's not clear as to why. I suggest that you submit a support request so that a Developer Support Engineer can look into this in more detail. If possible, please provide a small sample project that we can run and debug, but which fails to render to the page when you have the Browser set to Xml.
You mention that you're "also" getting this behavior in IE 6 and IE 7. What browser were you initially testing with?
Anybody ?
It's really strange, when I remove this property, everything works fine except load on demand...