GLNCY Glencore Plc (PK)

By Christopher Whittall 

September proved one of the worst months for Europe's corporate bond market in years, as a sharp selloff in bonds of Volkswagen AG and Glencore PLC reminded investors that even the biggest bluechips can run into trouble.

The extra yield investors demand to hold European corporate debt over government bonds has jumped to its widest level since October 2012 as bond investors have switched to assets they perceive as less risky, according to Markit.

Bonds of both the German auto maker VW and Swiss commodities trading firm Glencore have taken a particularly bad beating, accounting for 15% of the jump in corporate bond yields over government bonds, according to Credit Suisse analysts.

But the difficulties at the two companies have also served as a broader wake-up call about potential default risks lurking in the corporate sector, after years of falling corporate bond yields.

"Nobody wants to think in a credit rated as highly as VW that something could go wrong," said Peter Aspbury, a portfolio manager at J.P. Morgan Asset Management, which oversees $1.8 trillion in assets.

VW's and Glencore's woes are "an important reminder that credit risks do exist" among major corporate borrowers, he said.

Glencore's yields began their surge earlier this month as investors worried about the impact of falling commodity prices, triggered by a slowdown in China, and the company's significant debt-load. The yield on Glencore's five-year euro-denominated debt rose to as high as 8.4% Wednesday, from under 2% as recently as August, according to Tradeweb. Yields fall as prices rise. On average $70 million worth of Glencore bonds have changed hands a day in September in European secondary debt markets, about twice the average of the previous two months, according to data from MarketAxess.

At VW, investors are fretting over the firm's disclosure last week that as many as 11 million diesel cars contained software that U.S. authorities say allowed the company to dodge emissions standards. The yield on VW's five-year euro-denominated debt rose to as high as 2.9% Wednesday from around 0.9% earlier in September. European daily trading volumes for VW bonds leapt about tenfold to $756 million in the days following VW's disclosure, according to MarketAxess.

The selloff has spilled over into the broader auto sector.

The average yield on bonds belonging to auto companies has risen to 2.55% from 1.67% on September 18 before VW's disclosure, according to Markit. The average yield on basic materials companies has increased to 2.93% from 1.92% at the end of August.

Russell Silberston, a portfolio manager at Investec Asset Management, said the VW scandal clearly had implications for other auto makers, particularly if it leads to greater regulation or fewer customers buying diesel cars. However, he said that such events don't tend to have a lasting effect on bond markets.

For now, the selloff has cast a pall over the wider market, with the flow of new bonds slowing. Companies had issued $31 billion of European investment-grade corporate bonds so far this month as of Tuesday, compared with $63 billion in September 2014, according to Dealogic. This month is on track to be the slowest September for new deals since the height of the sovereign debt crisis in 2011.

"The market feels very volatile and weak," said Edward Farley, head of European corporate bonds at Pramerica Fixed Income, which oversees $550 billion in assets.

"There is a stack load of new bond deals waiting in the wings, but the market is not in a place to deal with it," he added.

Write to Christopher Whittall at christopher.whittall@wsj.com

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(END) Dow Jones Newswires

September 30, 2015 12:06 ET (16:06 GMT)

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