By Catherine Evans
LONDON, June 21 (Reuters) - European corporate bonds lost further ground on Friday, with debt-laden France Telecom and Deutsche Telekom among the weakest performers, as continued stock market slides undermined investor confidence.
Corporate bond yields have risen sharply this week as revived fears about corporate earnings and a possible double-dip recession in the U.S., and continued tension in the Middle East, have roiled stock markets on both sides of the Atlantic. Bond yields rise as prices fall.
Yields continued to drift higher on Friday, despite thin turnover as World Cup football again distracted dealers. Friday's quarter-final matches featured England and Germany, effectively halting activity in Europe's main bond trading centres for part of the day.
"The corporate bond market is generally wider today... Bonds are pretty unloved at the moment, and we have seen very few accounts buying," said a trader at a Dutch bank in London.
European shares, which sank to nine-month lows on Thursday, were slightly higher in afternoon trading, after testing post-September 11 lows early in the session.
They still looked set to post a fifth straight weekly loss, however, with a so-called "triple-witching" expiry of stock index options on European and U.S. markets adding to volatility risk.
According to the Reuters CorpTop index , investment-grade corporate bonds in euros were yielding an average 124 basis points more than government bonds of the same maturity at 1537 GMT, two basis points more on the day. Telecoms bonds were yielding an average 215.7 basis points more than government debt, 7.3 more from Thursday's close.
France Telecom's 6.75 percent 2008 bond was yielding around 385 basis points more than benchmark government bonds at around 1400 GMT, dealers said, off the day's lows but still higher by up to 40 basis points from Thursday's close.
The firm's shares slumped to a new record low of 11.71 euros, extending a 14 percent decline on Thursday, as investors awaited confirmation of a deal to rescue cash-strapped German mobile affilate MobilCom .
"The equity price is so beaten down that there is a lot of weakness in this name," said a Paris-based trader, also citing uncertainty about the MobilCom situation. "Although a MobilCom deal could be a short-term boost, there are still issues (at France Telecom) that need to be resolved."
France Telecom said on Thursday it had struck a preliminary deal with MobilCom's bank lenders that will allow it to buy its estranged partner, of which it already owns 28.5 percent, without adding MobilCom's loans to its own heavy debt burden. France Telecom owes over 61 billion euros, roughly four times its current market capitalisation.
Under the deal, France Telecom will guarantee 90 percent of MobilCom's loans provided equipment suppliers Nokia and Ericsson sign a 1.1 billion euro vender financing agreement and MobilCom boss Gerhard Schmid quits. Meanwhile, MobilCom's creditor banks will exchange most of a 4.7 billion euro loans for new debt convertible into France Telecom shares next year.
A MobilCom spokesman said Schmid had already begun clearing his office ahead of a meeting of its supervisory board on Friday that is expected to end with his being ousted.
Analysts at Dresdner Kleinwort Wasserstein said in a research note on Friday that France Telecom bonds were likely to remain volatile, even if a MobilCom deal -- which traders said should be positive -- was confirmed.
"Germany will remain a source of much uncertainty for France Telecom... (and) Mobilcom's debt is merely France Telecom's biggest uncertainty," the note said.
"But if there is a definitive Mobilcom debt announcement in the next few days, we may see the ratings reviews conclude and perhaps even the ratings cut to stable levels."
France Telecom is rated Baa1 by Moody's Investors Service, BBB+ by Standard & Poor's and BBB+ by Fitch Ratings, all of which have it under review for a possible downgrade. Moody's has said it may cut two notches, which would leave 55 percent state-owned France Telecom hovering just above "junk" grade.
Shares in German peer Deutsche Telekom have also hit historic lows this week, and yields on its bonds have risen, as worries about future earnings have exacerbated long-running concerns about its massive 67 billion euro debt burden. Its 7.5 percent May 2007 was yielding 234 basis points more than government bonds on Friday, 15 more on the day.
Automakers' bonds, second only to telecoms as the most liquid sector of the European corporate bond market, were also weaker, with yields higher by around five basis points versus benchmark government bonds across the board, traders said.