By Catherine Evans
LONDON, July 24 (Reuters) - Europe's corporate bond market took a fresh battering on Wednesday as regional stock markets sank to their lowest levels since the 1997 Asian financial crisis, stoking fears of further company collapses.
Dealers said yields on telecoms bonds, the largest component of European corporate bond indices, and the market's most indebted sector, had climbed between 20 and 30 basis points relative to benchmark government debt. Bond yields rise as prices fall.
"Everything is getting trashed. It's bedlam -- everyone is selling," said a trader at one London bank.
France Telecom's 6.75 percent 2008 euro bond was quoted at 99.75 percent of face value bid at around 1400 GMT, up from 99.50 on the day, and yielding about 380 basis points more than government debt.
Autos, the second most liquid sector, also saw yield premiums rise by more than 20 basis points, while utilities widened by between 10 and 20 basis points.
"Autos drifted wider this morning, but with the U.S.. coming in and showing no desire to get involved... it's looking a bit grisly," said a trader at a UK bank. "Poor liquidity because of holidays is accelerating the decline."
Yields on bonds of industrial companies widened by anything from 50 to 500 basis points, while financial sector credits -- once viewed as a safe haven, but now subject to worries about bad corporate loans -- also lost ground.
FINANCIALS SINK ON LOAN WORRIES
Citigroup and JP Morgan led U.S. banking stocks lower on Tuesday after U.S. lawmakers criticised their involvement with U.S. energy trader Enron . U.S. equities sank again on Wednesday, with the technology-heavy Nasdaq Composite Index crumbling further after falling to levels not seen since April 1997 on Tuesday.
Enron collapsed under a mountain of hidden debt, the first in a string of high-profile corporate collapses and debt defaults.
"It's grim. Everything is 20 to 50 (basis points) wider except triple-A rated short dated paper from retail banks," said a trader at a Dutch bank.
He quoted German giant Deutsche Bank's five percent bond due January 2009 at 100.16 percent of face value, down from 100.66 at Tuesday's close. Deutsche Bank was labelled earlier this week as having the biggest exposure among European banks to insolvent U.S. long-distance telephone and data company WorldCom .
European banks' subordinated debt, which ranks below other bonds and loans but above equity in the repayment hierachy, was around 40 basis points wider on average, the trader said.
Europe's biggest industrial engineering group, Swiss-based ABB was the worst-hit industrial credit, dealers said. Its 9.5 percent 2008 euro bond fell 10 points, to 82 percent of face value, after the firm reported disappointing first half results. British peer Invensys , which is struggling to reduce its huge debt load via asset sales, saw its bonds fall around four points.
Traders said thin trading during the European holiday season may have exaggerated some price moves.
"It's a bad day, really bad, but the market is overshooting. New York came in heavier than expected and the impact is being exaggerated by the lack of liquidity caused by it being July," said a credit analyst at a U.S. bank in London.
CREDIT PROTECTION COSTS RISE
The cost of credit protection also rose. One trader quoted the cost of insuring five-year Deutsche Telecom euro debt in the credit default swap market at between 370 and 390 basis points at around 1400 GMT, from 295 to 300 at Tuesday's close. Default swap prices are quoted as a percentage of the amount at risk, which is paid as a premium in return for protection.
Deutsche Telekom's euro bonds were quoted about 10 basis points wider, having also slipped 15 basis points on Tuesday, traders said.
The tone was slightly better in the high-yield market, although buying interest remained thin on the ground.
"Where there are bids they're getting hit but there are very few around," saod one dealer.
"People are looking to sell but there's no buyers. Kaufman & Broad managed to get their issue away and now we're waiting to see if ProSieben will come or if they'll delay again."
Even asset-backed debt, traditionally regarded as a safe-haven, stumbled on Wednesday. Secured bonds rose in value early this year, hitting historic highs in May and June as demand for the stable paper overwhelmed supply, but they have lost ground since.
"Anything secured on corporate assets is sliding. It's not dramatic yet but deals from autos are wider by three to five basis points," said a secured bond trader in London.
Dutch office supplies firm Buhrmann Group and Italian carmaker Fiat have both sold asset-backed bonds this week, but were forced to raise the rate of interest offered in order to entice investors.
--Additional reporting by Richard Lindsay, Kirsten Donovan and Alex Clelland