UK gilt dealers find market "particularly challenging" - DMO

LONDON, Jan 27 (Reuters) - British government bond dealers find market conditions highly challenging due to increased regulation and the cost of capital for funding their operations, the country's debt agency said on Wednesday.

"Banks are reassessing their business models accordingly," the UK Debt Management Office said in a report on an annual meeting between the primary dealers known as gilt-edged market makers (GEMMs) and the British finance ministry.

Investors in British government debt told the finance ministry that they had a strong appetite for long-dated debt, particularly that which paid an inflation-linked return. Planned issuance of index-linked bonds was below demand.

Pension funds also showed some appetite for the introduction of bonds linked to the Bank of England's consumer price index (CPI (Other OTC: CPICQ - news) ) rather than the older retail price index (RPI), as they had growing amounts of CPI-linked liabilities.

But gilt dealers said there would first need to be certainty about the design of CPI, which may be broadened in future to include a greater range of housing costs. (Reporting by David Milliken; editing by Kate Holton)