Brazilian yields fall on steady rates, weak growth

(Updates to close)

SAO PAULO Dec 10 (Reuters) - Weaker-than-expected economic growth data reassured investors on Thursday that Brazil might not see interest rate hikes any time soon, pressuring yields on near-term interest rate futures contracts <0#DIJ:> lower.

The yield on the contract due January 2011 DIJF1 fell to 10.34 percent from 10.46 while on the April 2010 contract DIJJ0 it fell to 8.74 percent from 8.8. Both were among the most active contracts of the day.

Government data on Thursday showed Brazil's economy grew 1.3 percent in the third quarter from the second, well below the 2 percent median view of 18 analysts polled by Reuters.

The weaker-than-expected gross domestic product data provided fresh evidence that the recovery is coming in at a weaker pace than forecast earlier, allowing the central bank to keep rates on hold for longer, economists said.

"The country is still on a growth trajectory, but it's a more moderate growth, and also more balanced," said Newton Rosa, an economist with SulAmerica Investimentos. "This gives the central bank more calm to conduct monetary policy over the next few months."

The previous night, central bank policymakers kept the country's benchmark interest rate, the Selic, at 8.75 percent for the third consecutive time. For more see [ID:nN09161138].

Investors use rate futures contracts to bet on trends in the Selic. The drop in yields suggests investors don't see tighter rates in Brazil for quite a while.

Longer-term futures contracts were only lightly traded.

"This reinforces our call for rate hikes somewhere around the start of the second half of 2010," SulAmerica's Rosa said.

The central bank slashed a cumulative 500 basis points off the Selic this year to help jump-start the flagging economy.

STOCKS, CURRENCY GAIN

Stocks rose, with the benchmark Bovespa index .BVSP closing up 1.05 percent to 68,728.29, rising in line with markets abroad.

Though the GDP number was below expectations it could still reassure investors who foresee tighter interest rates ahead, said Carlos Camacho, a fund manager with GAP Asset Management.

The 19-commodity Reuters-Jefferies index .CRB added 0.66 percent. The Bovespa includes several shares tied to trade in raw materials, including the two most heavily-weighted stocks, state-controlled energy company Petrobras and big miner Vale.

Petrobras (PETR4.SA) added 0.45 percent to 37.76 reais per share as crude oil CLc1 saw volatile trading.

Mining company Vale (VALE5.SA), the world's largest iron ore producer, gained 1.88 percent to 42.28 reais.

Stocks in the United States, the world's largest economy, ended higher as an unexpected narrowing in the October trade deficit suggested the economy was growing steadily. [ID:nN10183743]

Brazil's currency, the real BRBY, strengthened 0.34 percent to 1.766 per U.S. dollar. (Reporting by Luciana Lopez; Editing by James Dalgleish)