Brazil yields jump on April rate hike certainty

SAO PAULO, March 25 (Reuters) - Yields on Brazilian interest rate future contracts <0#DIJ:> for the shortest maturities jumped on Thursday, on expectations central bank policy-makers could raise borrowing costs in April for the first time in two years.

Bank policy-makers said on Thursday they are ready to raise the benchmark overnight lending rate as early as next month to rein in growing inflationary pressures. There was consensus that a hike was needed to slow growth in domestic demand and put it more in line with supply, according to minutes of last week's monetary policy meeting. For more see [ID:nN25214516].

Still, the majority of central bank officials decided to wait for further evidence of deteriorating inflation readings before taking action on rates. Three of the bank board's eight members voted for an increase of half a percentage point in the Selic rate BRCBMP=ECI from 8.75 percent now.

Yields for the contracts maturing between June 2010 and Jan. 2011 jumped while those for the longer tenors fell, indicating that prompt monetary action may not require additional increases beyond 2012.

"These strong and clear signals that the central bank intends to be vigilant and work to avoid being behind-the-curve on rates and inflation should bolster a flattening bias on the rate curve" for long tenors, Nick Chamie, head of emerging markets research at RBC in Toronto, said in a note to clients.

Investors use the rate contracts, known as DIs in Brazil, as a gauge of the level of the Selic at the end of each maturity.

The yield on the Jan. 2011 DIJF1 interest rate futures contract, the most widely traded in Sao Paulo, jumped 5 basis points to 10.37 percent on Thursday from its 10.32 percent close the previous day.

The yield on the contract due June 2010 DIJM0 advanced 1 basis point to 8.92 percent. In the meantime, the yield on the July 2012 tenor DIJN2 fell 3 basis points to 11.99 percent.

"It must be noted that there was also consensus among members of the committee for the need to adapt the pace of adjustments in the benchmark interest rate to the trend in prospective inflation," to limit current inflation pressures from becoming more permanent, the minutes said.

While most analysts expect the bank to start a tightening cycle on April 27 and push for increases between 200 basis points and 300 basis points through mid-2011, investors are pricing about 450 basis points of hikes in the same period.

REAL GAINS GROUND

The real BRBY, Brazil's currency, gained 0.4 percent to 1.795 reais per dollar, the second increase in six sessions.

The real gained in line with global markets after Germany endorsed a plan to help Greece reduce its budget deficit and avert a debt default. In addition, a plan by Dubai to commit $9.5 billion to the debt restructuring of Dubai World lowered risk perceptions around the world.

Chamie added that the central bank statement could "assist the currency to outperform." Often expectations of a rise in domestic interest rates tend to attract foreign capital in seek of higher returns.

The bank late on Wednesday also allowed companies to keep foreign exchange proceeds outside of the country for longer and granted the National Treasury more flexibility to act in the currency market.

While analysts such as Pedro Tuesta of market research company said the steps were another step in the government's effort to arrest excess inflows of dollars into Brazil, they are unlikely to have a impact in the short run.

Stocks also rose. The benchmark Bovespa stock index .BVSP climbed 0.7 percent to 69,396.30, led by an increase in shares of mining giant Vale (VALE5.SA) and commodity exporters.

Vale climbed 1.2 percent to 49.06 reais on optimism the company will be able to win a 90 percent increase in the price of iron ore from its customers.

Petrobras (PETR4.SA), Brazil's state-controlled oil company, rose 0.6 percent to 36.30 reais. Analysts at Itau Securities and other brokerages are betting that a plan to capitalize the company may be concluded earlier than most investors expect. (Reporting by Guillermo Parra-Bernal)