UK data prompts global bond sell-off as prospect of rate cut dims

By Abhinav Ramnarayan and John Geddie LONDON (Reuters) - Strong growth data in Britain prompted the worst daily sell-off in gilts for months and pushed yields on the world's benchmark bonds higher on Thursday, as expectations for a Bank of England rate cut fell. Britain's 10-year government bond was up 12 basis points to 1.27 percent, on track for its biggest daily rise since June 2015. The yield is also now at the highest level since Britain's June vote to leave the European Union, and it has prompted a sell-off in other major government benchmarks. German and U.S. equivalents rose to their highest since early June at 0.19 percent and 1.86 percent, respectively. With the market worried that central banks are stepping back from the ultra-accommodative stance of recent years, a reduced chance of a rate cut was enough to push benchmark bonds in Europe and U.S. to their highest level since the Brexit vote in late June. "The stronger GDP print in the UK has given further weight to speculation that the BoE will not provide further stimulus anytime soon," said Rabobank strategist Richard McGuire. "The market reaction to strong data prints has become more dramatic in the wake of speculation that central banks' modus operandi is changing and they are more focused on the negative effects of unconventional stimulus measures than the benefits," he said. British gross domestic product expanded by 0.5 percent in the July-September period, less rapid than the unusually strong growth of 0.7 percent seen in the second quarter but comfortably above a median forecast of 0.3 percent in a Reuters poll of economists. "There's been a general build-up of inflation expectations, so I think this data adds to that and has just given yields that extra push," said Investec economist Victoria Clarke. French and U.S. GDP data due out on Friday could give further impetus to inflation expectations. A key main gauge of long-term inflation expectations, the five-year five-year breakeven forward, hit 1.4813 percent on Thursday, its highest level since May. Concerns over reduced stimulus have increased in recent times, ever since the Bank of Japan on Sept. 21 changed its focus from money printing to targeted government bond yields. Rumours that the European Central Bank may reduce the scale of its asset-purchase programme exacerbated the concerns, and 10-year German Bund yields, the region's benchmark, are now 34 basis points higher than the September trough of minus 0.16 percent. SPAIN UNDERPERFORMS Spain's borrowing costs struck a three-month high on Thursday before a vote on acting Prime Minister Mariano Rajoy's bid to form a minority government and end 10 months of political deadlock. Rajoy is expected to win the vote in two rounds, and analysts said some investors had already decided to sell Spanish bonds, which they say are pricing in a high chance of success. Rajoy has offered to work with his opponents on major challenges such as pension and education reforms, but he is unlikely to get the backing on Thursday from the absolute majority of deputies that he needs. If he fails, a second vote will be called 48 hours later in which he simply needs more votes in favour than against, meaning that a recent decision by opposition Socialists to abstain should allow for a breakthrough. Rajoy's conservative People's Party (PP) won two elections in December and June but failed to secure a majority. Attempts to put together a coalition have failed. "Some investors are basically thinking that a government being in place has largely been priced in over the last week or so, and under that scenario there is only one way you can go from here if there is a slip back," Credit Agricole strategist Orlando Green said. Spanish 10-year bond yields rose as much as 7 basis points on Thursday to hit a three-month high of 1.22 percent . For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Larry King)