LONDON, Aug 23 (Reuters) - British government bond prices headed for their biggest daily gains since the collapse of Silicon Valley Bank more than five months ago as weak economic data for Britain and the euro zone dented expectations for further Bank of England rate rises.
Investors remain confident that the BoE will raise rates next month by a quarter point to 5.5%, but on Wednesday they expected only one more increase after that. On Tuesday they expected rates would peak at 6% before the end of this year.
Preliminary purchasing manager indices for August for Britain and the euro zone were below expectations of all economists polled by Reuters.
S&P Global, which published the data, said the numbers suggested Britain's economy would shrink 0.2% in the third quarter.
"Another rate hike in September looks a near-certainty but beyond that, traders have been paring back expectations," said Craig Erlam, senior market analyst at brokerage OANDA.
Financial markets now price in 60 bps more tightening from the BoE by February, down from 73 bps on Tuesday.
Similarly weaker-than-expected U.S. PMI data pushed bond yields down further.
Interest-rate sensitive two-year gilt yields hit a 12-day low of 4.924% at 1403 GMT and at 1530 GMT were 18 basis points down on the day at 4.96%.
Benchmark 10-year gilt yields were 17 bps lower at 4.48%, representing their biggest daily price gain since March 13, when the collapse of U.S. lender SVB drove a rush into safer government assets.
While German Bunds and U.S. Treasuries also rallied sharply, gilts outperformed them, with yield spreads for short- and medium-dated gilts tightening by 5-10 bps to their narrowest in around a week.
British inflation is higher than in other advanced economies which has forced the BoE to keep on raising rates. Wednesday's PMI data, however, showed the weakest rise in businesses' selling prices in two-and-a-half years. (Reporting by David Milliken Editing by William Schomberg)
