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Stronger GDP data pushes UK 5-year yields to highest since Brexit vote

LONDON, Oct 25 (Reuters) - British five-year government bond yields rose to their highest level since last year's vote to leave the European Union on Wednesday, as financial markets priced in faster Bank of England rate rises after stronger-than-expected growth data. Third-quarter gross domestic product grew 0.4 percent on a quarterly basis according to preliminary figures from the Office for National Statistics, beating average forecasts in a Reuters poll for a 0.3 percent rise. Sterling surged and British government bond prices sold off

as interest rate futures priced in a greater chance of

rate rises next year, on top of a widely expected rate increase next week.

Five-year gilt yields rose 6 basis points on the

day to peak at 0.865 percent at 1037 GMT, their highest level since Britons voted to leave the EU bloc on June 23, 2016.

Ten-year yields rose by a similar amount to peak

at 1.420 percent, their highest since Sept. 28, and gilts heavily underperformed against German debt. Gilts' yield premium

over 10-year Bunds widened by 5 basis points to 93

basis points, its highest since Oct. 17, despite Bund yields themselves hitting their highest in nearly three weeks. Vatsala Datta, a fixed income strategist at Royal Bank of Canada, said markets now priced in an 88 percent change of a BoE rate rise next week, up from just over 80 percent on Tuesday. The chances of the BoE hiking again in February had risen to 50 percent, and markets fully priced in a second rate hike by September 2018, compared with November previously. Some of this looked like an over-reaction to the figures, Datta said. "I think it would be very difficult for the BoE to make two hikes in three months," she said. "Generally the data has been quite weak ... and a lot depends on Brexit negotiations."

Dec long gilt future 123.55 (-0.59) Dec 2017 short sterling 99.455 (-0.02) Dec 2018 short sterling 99.090 (-0.04) 10-year gilt yield 1.41 pct (+5 bps)

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(Reporting by David Milliken; Editing by Richard Balmforth)