RPT-UK pensions change may test demand for 2040 linker

(Repeats late Monday story without changes)

LONDON, July 26 (Reuters) - Britain's syndicated sale of 30-year index-linked gilts expected on Tuesday, could prove a key test of demand after the government shocked the market with plans to change the way in which pensions are indexed to inflation.

Yields on long-dated index-linked gilts have jumped in the three weeks since the government announced plans to change legislation to require pension funds to uprate payments in line with the consumer price index, rather than the retail price index.

Index-linked gilts are uprated using RPI, so the alteration could have far-reaching effects on the linker market and demand for such bonds. RPI includes a bigger housing component and is currently running almost two percent higher than CPI.

The yield on the 2040 linker, which has a coupon of 0.625 percent, has risen by 25 basis points since early July to stand at 0.97 percent. It is almost 30 basis points higher than when it was launched in January.

Demand at the last auction of index-linked gilts was lower than at a previous sale and strategists are finding it hard to gauge demand at the syndication.

"The bond looks cheap on an asset swap basis and against surrounding lines, but it's a bit tricky to get a full understanding of how it may go," said Francis Diamond, strategist at JP Morgan.

"I don't know whether people will be put off by the changes, as investors still need to hedge, but anybody who's trying to buy bonds from a speculative standpoint may be put off."

The 2040 linker was launched via syndication in January when 3.5 billion pounds of the bond was sold.

Diamond said he expected the DMO to find buyers for a similar amount at this week's placement, which is being lead-managed by Deutsche Bank, Goldman Sachs, HSBC and Royal Bank of Scotland.

The DMO plans to raise 26 billion pounds of total issuance of 165 billion pounds via syndication in the 2010/11 fiscal year. So far it has raised 11.8 billion pounds using this method, with its last syndication raising a bumper 8 billion pounds.