UK gilt yields rise to highest since October 21 as markets ready for budget

UK 10- and 30-year gilt yields rise as much as 6 bps

*

Gilts enjoyed best month in nearly 2 years in October

*

Reeves expected to announce major tax rise on November 26

*

Investors digest report of potential income tax increase

*

Markets see 60% chance of BoE rate cut in December

LONDON, Nov 7 (Reuters) - British government bonds fell on Friday, pushing yields up to their highest in more than two weeks, as investors considered how finance minister Rachel Reeves might raise taxes in her upcoming budget.

Ten-year and 30-year gilt yields both rose as much as 6 basis points on the day to hit 4.493% and 5.280% respectively at 1416 GMT, their highest since October 21 and 3-4 bps more than the rises in equivalent U.S. government bonds.

British government bonds enjoyed their strongest month in nearly two years in October, on anticipation of fiscal consolidation in the November 26 budget, but some investors have been taking profits ahead of the event itself.

"I'd say 70% chance that she gets the budget right, 30% chance that she still manages to make a bit of a mess of it. So it's not a done deal," said Craig Inches, head of rates and cash at Royal London Asset Management, who is still long gilts but has reduced his exposure.

INCOME TAX HIKE?

Earlier this week Reeves told the public "we will all have to contribute" at the budget, which many economists viewed as a signal that she will break Labour's pre-election promises and raise income tax.

Late on Thursday, the Times reported that Reeves had formally asked Britain's budget watchdog to assess the impact of a 2 percentage point rise in income tax twinned with a 2 percentage point cut in social security contributions, a move that would raise a moderate 6 billion pounds ($8.05 billion) a year.

Inches said it was unclear to him if Labour lawmakers as a whole would back a rise in income tax. He said he would prefer a 1 percentage point rise in income tax without a cut in national insurance contributions, which would raise around 10 billion pounds.

"We've seen a little bit of weakness, today in gilts. I think now we're just seeing a little bit of profit taking on that gilt outperformance and a little bit of reduction of risk as we move into the main event," he said.

Investors are also digesting Thursday's decision by the BoE to keep interest rates on hold at 4% after a close 5-4 vote. Governor Andrew Bailey - who voted to keep rates on hold - opened the door to a cut in December if inflation pressures continued to ease.

Rate futures price in a roughly 60% chance of a quarter-point BoE cut in December, according to LSEG data.