It’s a head-scratcher. Why have investors suddenly decided to dump German government bonds? The sell-off, seemingly on no news, has been extraordinary, affecting the entire European bond market. Yields, which move inversely to the price of the bond, briefly hit 0.8% on 10-year German debt on Thursday. Then they fell to 0.57%, but even that represents a surge from 0.1% only a few weeks ago.
A glib explanation is to say that the ultra-low yields were wrong in the first place. Deflation is a worry, not a probability, so isn’t lending to any government for a decade for a near-zero return a surefire way to destroy your capital? But that doesn’t explain the suddenness of the move: the market in German government debt is meant to be deep, liquid and populated by grown-ups.
Greece doesn’t offer a plausible answer. Grexit – if anything – seems more likely than it did a month ago, in which case you’d expect a rush into German debt. “Supply indigestion,” ran another idea – in other words, lots of European governments issuing bonds, trying to take advantage of the European Central Bank’s bond-buying programme. Possibly.
But what will happen when bond yields start to rise for reasons that are easier to explain – for example, a return of modest inflation and higher interest rates. On the evidence of Thursday’s brief wobble in stock markets, it won’t be pretty for share prices.
Ladbrokes is losing its bet
One of Peter Erskine’s first acts as chairman of Ladbrokes six years ago was to cut the dividend and launch a rights issue. It wasn’t his fault, of course, that the bookmaker, drunk on delusions of resilience, had been trying to run with absurd levels of debt. But the cheery optimism that punctuated the annual report after the fundraising was definitely Erskine’s work. “We look forward positively with a heightened sense of momentum,” he wrote in 2010.
He’s been saying more or less the same every year, even as the longed-for momentum has usually been in the wrong direction. Erskine’s tenure is now closing with the share price lower than it was in late 2009, which hardly seemed possible at the time. In the same period, William Hill’s shares have roughly trebled in value. Or try this statistic: Ladbrokes, capitalised at roughly £1bn, is worth only half as much as upstart Betfair.
Gruff chairmen of the old-school say the job carries only two basic demands –appoint the right chief executive and fire him if things don’t work out.
Erskine chose Richard Glynn to knock Ladbrokes’ website into shape and stuck with him through umpteen profits warnings until last December. It was no surprise, then, that Thursday’s annual meeting produced a hefty 30% rebellion over Glynn’s princely payoff.
Erskine says he’s going because Ladbrokes needs a chairman “who will be able to see out the entirety of the next stage of the journey”. What he didn’t add is that the next staging-post for the dividend is likely to be lower. The City thinks it’s odds-on that new chief executive Jim Mullen will rip up Erskine’s semi-pledge to hold the line on the divi.
So, a cut on the way in and a cut on the way out – remarkable.
BT, too big to nail?
BT, as its rivals have noticed, is a formidable beast these days. Thursday provided a further illustration: “adjusted” pretax profits rose 12% to £3.2bn, free cashflow was £2.8bn, and the dividend was hiked 14%. Meanwhile, the retail business had a “record-breaking” 266,000 fibre broadband connections in the final quarter. Next year, if all goes to plan, BT will be reporting on its improvements at mobile operator EE, a £12bn purchase awaiting a regulatory thumbs-up.
A monopolistic behemoth in the making? That’s the gist of the complaints from competitors, such as TalkTalk and Sky, who want BT broken up – meaning the full separation of Openreach, which runs the national broadband network. They are pinning their hopes on Ofcom’s current 10-yearly review of the market.
The break-up question certainly isn’t simple. Would a liberated Openreach be more or less inclined to invest in hi-speed capacity? And would those investments result in lower prices and better service?
Critics says there is an inherent conflict of interest in a critical piece of infrastructure, serving a range of competitors, being a subsidiary of BT.
BT maintains that a sitting tenant is required to encourage the investment to happen in the first place at affordable prices. Besides, it argues, functional separation of Openreach has been a fact of life for a decade, giving Ofcom freedom to intervene.
That technical debate can resume once we’ve heard Ofcom’s first thoughts. In the meantime, though, there are probably two reasons why BT’s investors appear wholly unconcerned by the noise.
First, the UK would be going out on a limb by ordering a break-up of BT; other big European companies haven’t acted in similar fashion with their former incumbents.
Second, nothing will happen soon. Even if Ofcom sees merit in releasing Openreach, the Competition and Markets Authority would have to be convinced, which could take two years, and then BT might appeal all the way to the supreme court. In stock market terms, that counts as an age.
